Find the best account for your education savings goals with Vanguard. Compare options and get tips to choose the right plan for effective college savings.

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Which account is right for your education savings goals?

Which account is right for your education savings goals?
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A mother lays beside her young son, smiling lovingly as they watch something on the tablet in her hand while the dog sleeps peacefully beside them.

What is a college savings plan?

With tuition costs on the rise, it's more important than ever to start saving for your child's education early. When students know they have financial support, they can focus on their future instead of stressing over debt and how they'll afford school.

A college savings plan, or college savings account, is a financial tool that helps parents, grandparents, family, and friends prepare for the costs of higher education for a beneficiary. While there are many ways to save for college, accounts designed specifically for education savings, like 529 plans, offer valuable benefits such as tax breaks, higher contribution limits, more spending flexibility, and strong earning potential.

529 savings plan

A state-sponsored investment plan that lets families save for future education costs and withdraw investment earnings federally tax-free when used to pay qualified expenses including qualified higher education expenses, tuition, room and board, and supplies. Families can also use 529 assets for K–12 tuition of up to $10,000 per student per year for enrollment or attendance at a public, private, or religious school.

UGMA/UTMA

Uniform Gifts to Minors Act or Uniform Transfers to Minors Act account owned by a minor that's off limits until he or she reaches adulthood. After that, the money can be used for any purpose.

General investment account

An account that holds stocks, bonds, or mutual funds. The money can be used for anything.

State tax breaks

No. The money in these accounts receives no special state tax treatment. You'll pay tax on earnings as they accrue.

Federal tax breaks

No. The money in these accounts receives no special federal tax treatment. You'll pay tax on earnings as they accrue.

Low impact on financial aid for higher education

Yes, if you (as the parent) own the account, only about 5% of the money in these accounts is counted against financial aid.

High contribution limits

Yes. You can invest any amount.

Earning potential

Yes. You can invest the money in almost any type of security, including growth-oriented investments like stocks.

Access to your money

Yes. You can withdraw the money for any reason at any time.

Age-based options—designed for higher education

No. Age-based options aren't available.

Total flexibility

Yes. You can use the money for anything.

Account control

Yes. You control the account.

Learn more about accounts for general investing

Education savings account (ESA)

An account that can be used for any level of education (kindergarten through postsecondary).

Vanguard no longer opens new ESAs (also known as "Coverdell ESAs"), nor do we allow new ESAs to be created with money from an account transfer.

State tax breaks

No. The money in these accounts receives no special state tax treatment. You'll pay tax on earnings as they accrue.

Federal tax breaks

Yes. Any earnings grow tax-deferred, and withdrawals are federal income tax-free when used for qualified education expenses.

Low impact on financial aid for higher education

Yes, almost always. Only about 5% of the money in these accounts is counted against federal financial aid, even if the student is also the account owner. However, if the account is owned by a student who is not claimed as a dependent, or if the account is owned by someone else (grandparent, family friend, etc.), it could have a larger impact.

High contribution limits

No. You can contribute a maximum of $2,000 each year per beneficiary (the person you're opening the account for).

Earning potential

Yes. You can invest the money in almost any type of security, including growth-oriented investments like stocks.

Access to your money

Yes. You can withdraw your money for any reason at any time, although you may pay taxes and a 10% penalty on the earnings portion of your withdrawal if you're not using the money for qualified education expenses.

Age-based options—designed for higher education

No. Age-based options aren't available.

Total flexibility

No, these accounts are meant to be used for education. However, you can use the money for elementary, secondary, and postsecondary education, or change the beneficiary if you don't end up needing the money. Or you can withdraw your money for any reason and pay taxes and a 10% penalty on the earnings (but not on the contributions).

Account control

Yes, for the most part, you control the account. However, once the beneficiary reaches age 30, if there's still money in the account, you'll have to give the money to him or her (and pay taxes and penalties) or roll it over to another beneficiary.

When must contributions stop?

No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary.

State tax breaks

The benefit

Some states have tax benefits for qualified education expenses, which are described below. To find out if you qualify for a state benefit for education expenses, check the state where you pay state income tax—even if another state sponsors your 529 plan. Consult your tax advisor for further guidance.

How it works

Many states allow you to deduct your contributions (up to a certain amount) from state income tax, and some even offer a tax credit for the amount you contribute.

Combined with federal tax benefits, these state tax benefits can make a big difference. For example, if you put $25 per week into an account that offers a tax deduction, you'll save $65 on taxes that year if your state tax rate is 5%. If you put that $65 back into your 529 college savings account, you could accumulate an additional $3,500 for college after 18 years compared to an account with no tax benefits.

See how much your state tax deduction could save you

This hypothetical illustration assumes an average annual return of 6%. It doesn't reflect any particular investment, nor does it account for inflation or federal tax considerations. It also assumes that all withdrawals from the tax-deferred account are considered qualified. Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax as well as state and local income taxes.

The assumed rate of return isn't guaranteed, and the results would be different given a different rate of return. When making an investment decision, you should consider your own timeline and income tax bracket, as the illustration may not reflect your situation.

Savings unlikely to impact financial aid

The benefit

Have less of your savings count against your financial aid eligibility.

How it works

Accounts are treated differently when it comes to financial aid calculations. The federal government and your child's school might expect you to use anywhere from 0% to 20% of your savings to pay tuition, depending on the account type and who owns it.

For example, assets in IRAs or other retirement accounts are typically excluded from financial aid calculations. Student-owned assets could reduce aid by up to 20% of their value, so for every $1,000 a student holds in an UGMA/UTMA or other investment account, aid could be reduced by up to $200. Parent-owned assets, whether in a 529 or another investment account, only reduce aid by up to 5.64%. So for every $1,000 in a 529, aid could be reduced by about $56.

If the 529 is owned by a grandparent or other relative, the assets generally don't factor into financial aid calculations at all.

Spending unlikely to reduce financial aid

The benefit

Prevent your spending from reducing financial aid eligibility.

How it works

Spending from a 529 account doesn't result in income that could lower financial aid.

Spending from some account types has the potential to increase income values used in financial aid formulas. If the investments in a taxable investment account, such as an UGMA/UTMA, have appreciated, the gains will be treated as income in the calculations and could reduce financial aid. Retirement account spending could have a significant impact because the full distribution amount is treated as income for financial aid purposes.

Federal tax breaks

The benefit

Pay less in taxes with tax-deferred earnings and tax-free withdrawals.

How it works

  • Tax-deferred earnings. You don't pay taxes on the money you earned until you withdraw it.
  • Tax-free withdrawals. With some accounts, if you use the money for qualified education expenses, you won't pay any taxes on your earnings—ever. It can make a big difference.

For example, imagine you and your friend each open college savings accounts at the same time and contribute $25 per week for 18 years. You choose an account with federal tax benefits, while they open one without tax breaks. When taxes are due on their earnings, they use money in their account to pay them.

If you both earn 6% per year on your investments, you'll have about $3,800 more in your account when it's time for college. That's just over three years' worth of books and supplies at a public or private 4-year institution.

This hypothetical illustration doesn't reflect any particular investment nor does it account for inflation or any state tax considerations. It assumes your friend pays 25% in federal income taxes on investment gains. (Note that investment gains may be taxed at a more favorable rate.) It also assumes that all withdrawals from the tax-deferred account are considered qualified. Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax as well as state and local income taxes. The assumed rate of return isn't guaranteed, and the results would be different given a different rate of return. When making an investment decision, you should consider your own timeline and income tax bracket, as the illustration may not reflect your situation.

Low impact on financial aid for higher education

The benefit

Have less of your savings count against your financial aid eligibility.

How it works

Accounts are treated differently when it comes to financial aid calculations. The federal government and your child's school might expect you to use anywhere from 0% to 20% of your savings to pay tuition, depending on your account type.

For example, imagine you have $60,000 saved for college when it's time to apply for financial aid. Those savings might not hurt your kid's financial aid eligibility at all—or they might chop it by $12,000 ($60,000 x 20%) in the first year alone.

High contribution limits

The benefit

Contribute large or unlimited amounts to the account.

How it works

Some account types limit how much you can save for education in a single year. Don't let an account with lower contribution limits get in the way of your education savings goals.

Earning potential

The benefit

Give your money more potential to grow.

How it works

Saving enough money for education is tough, but it can be easier when you have some help. Put your money to work and let compounding help get you closer to your goal.

For example, imagine you saved $3,000 each year for 18 years at a 6% rate of return. If you invested in a 529 account, you could have saved $103,453 for education.

This same investment, time frame, and rate of return in a taxable account could result in a balance of $77,790—over $25,000 less than in a 529 plan, as a result of capital gains and income taxes.

This hypothetical example of a long-term average return does not represent the return on any particular investment and the 6% rate is not guaranteed. It is an illustrative example of a long-term average return on a balanced investment of stocks and bonds. The account comparison assumes 4% annual capital and 2% annual income returns. After-tax return assumes a complete liquidation of the account, including applicable taxes. Calculations assume a 22% federal income tax and 5% state income tax, along with a combined 20% capital gains tax rate.

Access to your money

The benefit

Get the value of your investment back at any time.

How it works

Some types of accounts are owned by the student you're saving for—so that money belongs to them, no matter what.

Target Enrollment Portfolios

The benefit

Select an all-in-one education savings investment that's automatically rebalanced and managed for you over time.

How it works

Target enrollment portfolios make it easy to consider an investment based on the year you expect your beneficiary to start attending school—whenever that may be. Target enrollment portfolios offer a diversified portfolio that adjusts its asset mix over time. As you get closer to the beneficiary's target enrollment date, the portfolio incrementally decreases exposure to stocks and increases exposure to bonds to reduce risk. 

Explore Vanguard Target Enrollment Portfolios

Spending flexibility

The benefit

Use your money for anything, at any time, without penalty.

How it works

Account types that offer tax incentives for savings will generally have a penalty if you don't use the money for qualified expenses. For 529 plans, qualified expenses generally include tuition, room and board, books, supplies, and other qualified expenses at any accredited vocational school, apprenticeship program, college, or graduate school in the United States or abroad. You can also use your 529 plan assets for K–12 tuition of up to $10,000 per student per year at a public, private, or religious school.

Residents of many states have additional flexibility and can also use 529 funds for up to $10,000 per year for tuition at qualified elementary or secondary schools, or to pay for up to $10,000 in student loan principal or interest.

Account control

The benefit

Retain control over your money.

How it works

It's your money, so you should decide how to use it, right?

For some account types, it's not that simple. If control of the money is turned over to your child when they become an adult, it might get used for college … or it might not.

Contributions

Money placed in an individual retirement account (IRA), an employer-sponsored retirement plan, or other retirement plan for a particular tax year. Contributions may be deductible or nondeductible, depending on the type of account.

Learn more about 529 plans

Explore the benefits

Types of college savings accounts

There are 3 types of accounts designed for education savings: 529 plans, Coverdell education savings accounts (ESAs), and prepaid tuition plans. Each has a unique purpose, function, and range of flexibility, so you'll want to review which one best meets your needs.

529 plans

529 plans are one of the most popular education savings account types in the U.S., offering tax benefits, high contribution limits, and flexibility. You can withdraw 529 savings tax-free to pay tuition and fees for college, K–12, graduate school, trade school, or vocational programs. Funds may also cover qualified education expenses such as books, supplies, room and board, and, in some cases, student loan debt.1

There are no income eligibility limits for opening a 529 plan, so anyone can start one. While total contribution limits vary by state, they typically exceed six figures. And although contributions to student- or parent-owned 529s may impact financial aid eligibility, earnings don't count as income, and any investment growth is tax-free, which can significantly increase the value of your savings over time.

529 plans may also employ target enrollment portfolios that are managed and automatically rebalanced over time, gradually reducing exposure as the target date approaches.

Most states offer 529 plans, and you can save through any state's plan, no matter where you live. Some states even offer a state income tax break. Funds can be used at eligible institutions in any state (for example, a plan opened in Ohio can pay for school in Illinois). However, some states have rules that exclude 529 savings when determining eligibility for state grants or other financial aid.

When selecting a 529 plan, consider any tax breaks your state offers, as well as plan fees, investment options, and minimum requirements for opening and contributing.

529 plans accommodate a wide range of educational paths, so even if your loved one isn't sure what they want to do in the future, you can feel at ease knowing they'll have options. And if the beneficiary doesn't need the money for education, you can change the beneficiary or, under certain conditions, roll over the money into a Roth IRA for the original beneficiary.2

View the tax benefits of your state's 529

Compare 529 plans

Coverdell ESAs

A Coverdell ESA is another tax-advantaged account designed specifically for higher education or K–12 expenses. Like a 529 plan, any investment growth is tax-free and qualified withdrawals are tax-exempt.

However, Coverdell ESAs are not commonly used due to some notable restrictions. First, there are income eligibility limits: Single filers earning $110,000 per year or with a modified adjusted gross income (MAGI) of $95,000, and joint filers with a combined income of $220,000 or $190,000 MAGI aren't eligible to contribute. Also, the maximum total annual contribution is $2,000 per beneficiary, which may make it harder to reach your education savings goals.

Prepaid tuition plans

Prepaid tuition plans are a type of 529 plan that allows the account holder to prepay all or part of the beneficiary's tuition at a college or university in advance. The account is guaranteed to grow at the same rate as tuition increases, regardless of how much costs rise, so there are no surprises at enrollment. Payments can be made either in a lump sum or through an approved installment plan.

Prepaid tuition plans may not be an option for you, as they're currently offered by only 9 states. While they can provide protection against rising tuition costs, they offer far less flexibility. These plans can only be used for college tuition, unlike 529 savings plans, which cover a broader range of education-related expenses. Also, most prepaid tuition plans can only be used at in-state institutions.

Alternatives to using a college savings account

While college savings plans like 529s aren't the only way to help you cover education costs, the alternatives have drawbacks you'll want to be aware of. Depending on your needs and goals, you might consider an UGMA or UTMA account, a general investment account, a Roth IRA, or a whole life insurance policy. But it's important to understand the differences between them, including eligibility rules, tax benefits, and contribution and withdrawal limits, and why they may not be the best way to save.

UGMA/UTMA

Under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), you can set up a custodial account on a minor's behalf. These accounts aren't designed specifically for education and don't provide the tax breaks 529 plans offer. However, there are no contribution limits, so you can invest as much as you like, and the beneficiary can use the money for anything if they don't need it for education.

UGMA/UTMA accounts belong to the beneficiary. They're managed by a custodian until the minor reaches a certain age, usually 18 in most states, and the custodian may only withdraw funds to put directly toward expenses for the beneficiary such as education, transportation, or living expenses. Once the beneficiary reaches adulthood, they take control of the account and can use the money however they choose.

It's important to note that an UGMA/UTMA account can significantly affect federal financial aid eligibility. Because the account is considered a student asset, it has a greater impact on those calculations than a college savings account held by a parent or family member.

Learn more about UGMA/UTMA

General investment account

A general investment account, or brokerage account, is an individual or joint account that can hold mutual funds, ETFs (exchange-traded funds), stocks, bonds, and more. Though general investment accounts offer a lot of flexibility, they don't provide the same tax benefits as 529 plans, and their earnings could affect financial aid.

The account holder can withdraw money for any reason, at any time, so spending isn't limited to education-related expenses. But you'll owe taxes on investment gains and dividends over time, and unlike in tax-advantaged education accounts, earnings in a general investment account don’t grow tax-free.

Roth IRA

A Roth IRA allows you to make after-tax contributions and withdraw funds tax-free once you're over age 59½ and have held the account for at least 5 years.3 Some investors consider using a Roth IRA to save for college, since withdrawals of contributions (the money you put in) before age 59½ are always tax- and penalty-free. However, earnings withdrawn before age 59½ are generally subject to income tax and a 10% penalty, though the penalty is waived if the funds are used for certain qualified education expenses.

But using a Roth IRA for college could leave you short of your education savings goals. The Roth IRA contribution limit for 2026 is $7,500 per year ($8,600 if you're age 50 or older), which is significantly lower than the contribution limits for 529 plans. Also, while withdrawals from Roth IRAs for education expenses aren't treated as income on your taxes, they are considered income in calculations for federal financial aid. 

Whole life insurance

Also known as traditional life insurance, whole life insurance provides a death benefit for beneficiaries, typically paid out tax-free, to help cover funeral expenses and other final costs. But policies also sometimes include an interest-bearing cash savings component from which you can draw and borrow, so they're occasionally positioned as a way to save for college.

It might sound like a good deal, but there are downsides. It can take years for the cash value to equal the total premiums paid. Returns are typically lower than what you might earn in the broader financial markets, which could mean less money for college. And withdrawals may be treated as taxable income and affect financial aid eligibility. Overall, whole life policies tend to be less efficient for college savings compared to alternatives, given their higher costs and slower growth.

Compare common college savings options

While there are many paths to achieving your education savings goals, consider how the most popular and effective financial tools stack up against 529 plans.

 

Benefit 529 Built for education UGMA/UTMA General investing Roth IRA
State tax breaks Icon of a check mark inside a circle      
Federal tax breaks Icon of a check mark inside a circle     Icon of a check mark inside a circle
Savings unlikely to impact financial aid Icon of a check mark inside a circle   Icon of a check mark inside a circle Icon of a check mark inside a circle
Spending unlikely to impact financial aid Icon of a check mark inside a circle Icon of a check mark inside a circle    
High contribution limits Icon of a check mark inside a circle Icon of a check mark inside a circle Icon of a check mark inside a circle  
Earning potential Icon of a check mark inside a circle Icon of a check mark inside a circle Icon of a check mark inside a circle Icon of a check mark inside a circle
Account control Icon of a check mark inside a circle   Icon of a check mark inside a circle Icon of a check mark inside a circle
Target enrollment portfolios Icon of a check mark inside a circle      
Spending flexibility     Icon of a check mark inside a circle

Picking the best college savings plan for you

529 plans are widely used by investors saving for education. Benefits include tax breaks, high contribution limits, account flexibility, and earning potential on your investments. While other account types may be a better option in select circumstances, most can't match the versatility of 529s for education savings.

Take advantage of the benefits of 529 plans

For nearly 25 years, Vanguard has been helping families use 529 plans to prepare for higher education. The Vanguard 529 Plan offers a variety of investment options, and our costs are among the lowest in the industry.4

Ready to start a Vanguard 529 Plan?

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1Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements. State tax treatment of withdrawals used for i) expenses in connection with enrollment or attendance at an elementary or secondary public, private, or religious school, ii) expenses related to apprenticeship programs, iii) student loan repayments, iv) Roth IRA rollovers, or v) expenses for postsecondary credentialing programs is determined by the state(s) where the taxpayer files state income tax. If you are not a Nevada taxpayer, please consult with a tax advisor.

State tax treatment of withdrawals for K-12 expenses, apprenticeship program expenses, student loan repayments, Roth IRA rollovers, and postsecondary credentialing program expenses is determined by the state(s) where the taxpayer files state income tax. Please consult with a tax advisor for further guidance.

2Certain restrictions apply. Rollover must be to a Roth IRA maintained for the benefit of the beneficiary. Rollovers can only be made from accounts open for at least 15 years and cannot include contributions or earnings on those contributions made within the last 5 years. The annual rollover limit is subject to IRA annual contribution limits with a lifetime rollover limit of $35,000. Additional restrictions may apply under federal Roth IRA rules and guidance. Consult your tax advisor prior to initiating a rollover.

3Withdrawals from a Roth IRA are generally tax-free if you are over age 59½ and have held the account for at least five years; withdrawals of earnings taken prior to age 59½ or five years may be subject to ordinary income or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made.)

4Vanguard average 529 expense ratio: 0.14%. Industry average 529 expense ratio: 0.48%. Average annual asset-based fees for age-based portfolios. Source: ISS Market Intelligence, as of December 2024.

For more information about The Vanguard 529 College Savings Plan, visit vanguard.com to obtain a Program Description (PDF), which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Vanguard Marketing Corporation, Distributor.

All investing is subject to risk, including the possible loss of the money you invest.

The Vanguard 529 College Savings Plan is a Nevada Trust administered by the office of the Nevada State Treasurer. 

The Vanguard Group, Inc., serves as the Investment Manager for The Vanguard 529 College Savings Plan and through its affiliate, Vanguard Marketing Corporation, markets and distributes the Plan. Ascensus Broker Dealer Services, LLC, serves as Program Manager and has overall responsibility for the day-to-day operations. The Plan's portfolios, although they invest in Vanguard mutual funds, are not mutual funds, neither are the Vanguard Short-Term Reserves Account and Bank Savings Portfolio. Investment returns are not guaranteed (except as described in the Program Description for investments in the FDIC-Insured Bank Savings Portfolio), and you could lose money by investing in the Plan.

If you are not a Nevada taxpayer, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Other state benefits may include financial aid, scholarship funds, and protection from creditors.