How Does the One Big Beautiful Bill Impact Saving for College?

The recently passed budget reconciliation act, known as the One Big Beautiful Bill (OBBB), made a number of changes to the way families can pay for college in the future, including making updates to college savings plan options. Here’s a summary of the changes impacting college savers and what they mean for families: Expanded Use of 529 Savings Plans The OBBB expands the use of 529 Savings Plans in a couple of important ways:

• K-12 expenses: While often considered a college savings account, 529s have, since 2018, allowed for the withdrawal of up to $10,000 per year to pay for private elementary and secondary school tuition. The OBBB increases the elementary and secondary school withdrawal limit to $20,000 per year, and expands the list of eligible K-12 expenses beyond tuition. New eligible expenses include:
  • Books & supplies
  • Online learning tools
  • Tutoring
  • Standardized test fees
  • Dual enrollment courses
  • Learning therapies for students with disabilities
  These changes offer additional flexibility to families paying for K-12 expenses, although parents considering their child’s 529 to be a college savings account should be mindful about exhausting funds on pre-college expenses.  
• Workforce training: While qualified postsecondary expenses were previously limited to programs at traditional colleges and universities, the new legislation expands the tax-free use of 529 funds for additional types of workforce training. New qualified expenses include tuition; books, supplies, & equipment; exam fees; and continuing education required for postsecondary credentials earned outside of a college environment. The types of career credentialing these new provisions may apply to are far ranging, including licensing, exams, and continuing education for plumbers, financial planners, cosmetologists, lawyers, electricians, and beyond. These new provisions offer flexibility to parents wanting to save for education for their children across both college and non-college pathways, as well as working professionals planning for their own credentialing and continuing education costs.

Permanent 529-to-ABLE Rollover Ability Previously set to expire at the end of 2025, the provision allowing the rollover of funds from a 529 Savings Plan to an ABLE Account without tax implications was made permanent. While 529s allow for tax-free withdrawals for qualified education expenses, ABLE accounts offer an expanded list of qualified disability-related expenses that allow for tax-free withdrawals for individuals with a documented disability. The list includes education expenses, but also includes expenses related to employment training, housing, transportation, health, assistive technology, personal support services, and more. Parents who have funded a 529 Savings Plan for their child, but later determine they wish to use the funds for disability-related expenses beyond education, will now have the permanent ability to rollover 529 funds into an ABLE account without taxation. New Savings Account Option The OBBB authorized the creation of a new type of savings account available to parents looking to save for their children’s futures. The new Trump Accounts (as titled in the legislation) will allow for up to $5,000 in contributions per year, on an after-tax basis for individuals. Employers will be permitted to contribute up to $2,500 on a pre-tax basis for their employees’ dependents or teenage employees, though that $2,500 rolls up to the same $5,000 total annual contribution limit. Both amounts will be indexed for inflation. The federal government will also seed the accounts with a one-time $1,000 contribution for children born between 2025 and 2028. Money contributed to Trump Accounts will be invested in a fund that tracks a U.S. stock index and earnings can grow on a tax-deferred basis. Families should note that there are no withdrawals prior to age 18, and withdrawals made before age 59 ½ are subject to taxation at the beneficiary’s ordinary income tax rate, plus a 10% penalty. Exceptions to the early withdrawal penalty include withdrawals for a first-time home purchase and postsecondary education expenses, providing potential utility as a college savings account. While the tax benefit of these new Trump Accounts (tax-deferred growth) does not equal that of 529 Savings Plans (tax-free growth), the $1,000 in seed money for new babies, along with possible employer contributions, may provide a welcome head start for families planning for their children’s futures. It is also worth noting that, unless an exception is made in future financial aid legislation, these accounts will likely be treated as student assets in the financial aid process and therefore be subject to a higher assessment rate in the financial aid formula than 529 Savings Plans and other parental assets. Next Steps In closing, while the OBBB is now law, significant work remains for the Treasury Department (in likely coordination with the Departments of Education and Labor) to implement the above provisions. In addition, federal tax treatment does not necessarily equate to state tax treatment, and states will need to pass additional legislation if they wish to align state tax policy with the provisions of the OBBB. It is recommended that families consult with their tax and/or financial advisors before electing a savings plan that is right for them.