The cost of college is astounding today and paying for it can be difficult to figure out. There are thankfully ways to start saving early on in life, especially in the form of 529 College Savings Plans. However, the plans aren’t understood fully by many in the population. Here are some myths to avoid when considering a 529 Savings Plan for your family.

Myth #1: You have to invest in your own state’s 529 plan.

Fact: 529 plans are not all created equal, so it’s a good thing that you can choose the one that’s best for your family, but you don’t need to pick your state’s plan. What should you look out for? Many states partner with for-profit companies to offer so-called “advisor-sold plans,” which typically have higher fees that can take a significant bite out of your investment’s growth. On the positive side, 35 states offer additional tax incentives to save with a 529 plan, including 7 that offer these incentives even if you use a different state’s plan. Some states offer sign-up bonuses at certain times of the year. Among the best-reviewed direct-sold plans are Utah, California, and New York.

Myth #2: You need to hire a financial advisor to navigate the confusing landscape of 529 options.

Fact: Yes, the myriad of options can make the 529 landscape confusing, but with a little research (try or you can figure out the best option for yourself.

Myth #3: You have to do it all on your own.

Fact: Millennial parents, many of whom are saddled with their own college debt, have figured out that one of the best ways to save more for their kids’ future college costs is to turn to their circle of family and friends. Some states have added features to their websites to make it easier to receive savings gifts – or you can try, where it takes just a few minutes to sign up for a 529 and invite family and friends to contribute at birthdays, holidays, and other special occasions.

Myth #4: You should pay off all your other debts before you start saving for college.

Fact: While paying off college debt should be a priority, it usually makes financial sense to simultaneously pay off your debt and start saving for your kids while they’re still young. Average returns from stock investments are typically much higher than the interest you are paying on your student loans, and that’s not even taking into account the tax-free gains and state incentives you can get with a 529.

Myth #5: Your college fund will negatively impact your child’s ability to qualify for financial aid.

Fact: Money saved in a parent-owned 529 only reduces a student’s aid package by up to 5.64% of the account’s value, a much more favorable tax treatment than if a grandparent or the student owned the account. Withdrawals from other savings vehicles, such as Roth IRAs, are counted as student income and are assessed at up to 50% of value when it comes time to determine a student’s financial aid package.

Myth #6: I make too much money to qualify for a 529 Plan.

Fact: 529s are a lot more flexible than retirement accounts and other educational savings accounts and do not have any income limits. Contribution limits are set by the states and can be as high as $485,000.


Jordan Lee is founder of San Francisco-based CollegeBacker.