The Financial Compass

Historically, education planning has been viewed solely as college tuition and room & board planning along with some other ancillary expenses you incur along the way. As a former college student, that is just the beginning of the costs.

With the passing of the One Big Beautiful Bill Act (OBBBA) last year, education planning should be viewed in an even more comprehensive manner. At Stillwater, our job is to educate our clients about the tools they have at their disposal, which expenses qualify, and help them make informed decisions.

However, the question on many parents’ minds is how will education evolve? It is already so expensive. Will the cost of education continue to rise at this rate? Will college even be necessary in the future with AI? How does this change planning?

Higher Education Still Pays

The future education landscape may evolve, but the value of education, especially higher education today still persists. According to JP Morgan’s College Planning Essentials: 2026 Edition, the average annual earnings by highest educational degree are as follows:

• High School Graduate—$50,410/year
• Bachelor’s Degree—$91,430/year or 81% higher
• Professional Degree—$177,000/year or 251% higher

In short, higher education continues to pay and it is not yet showing signs of reverting despite AI momentum mounting. However, the selected major plays an important role in determining the return on your investment. The average salary between a computer science major and education major is stark. If you plan on taking on student loans, this is a vital part of the decision-making process.

So, how is Stillwater addressing the uncertainty in education’s future evolution in our planning? For those with education related goals, we often find that a combination of 529 plans and taxable accounts tend to be the optimal solution.

529 plans are used for dollars earmarked for K-12 tuition, certifications, or college tuition, room & board, and other qualified education expenses. Taxable accounts then provide flexibility to help those concerned with overfunding 529 plans earmark dollars for similar goals without subjecting them to potential penalty if things change. They also allow you to pay for non- qualified expenses that you incur along the way related to education.

The key is making sure those dollars are working for you in the market, regardless of the account type. A savings account at your local bank likely won’t cut it, despite where rates sit today.

529 Plan Overview: Savings Plans vs. Pre-Paid Tuition Plans

A 529 plan can either be a tax-advantaged education savings plan or pre-paid tuition plan. Both are designed to pay for qualified education expenses. The savings plan offers the opportunity to invest contributions, which comes with market risk, but also the opportunity for higher returns. Most state plans over managed investment allocations as well as the option to make your own investment decisions.

Pre-paid tuition plans lock in current tuition rates, meaning your returns are effectively equal to the rate of tuition inflation. However, the plan is often tied to public in-state college tuition, so it doesn’t account for children picking different universities. This introduces the risk that the eventually chosen school’s tuition rises faster than the public in-state benchmark.

This century, the annual average college tuition inflation has been nearly 4% compared to an inflation rate of 2.56%. What this should tell you is that investing towards these goals to keep pace or outpace that historical inflation rate associated with higher education is a required for most, not an option.

Contributions & Taxes: 529 Plans vs. Taxable Accounts

Focusing on 529 Savings Plan vehicle, who can contribute? Parents, grandparents, beneficiaries, extended family, and friends. At the same time, it’s important to understand the FAFSA impact certain kinds of 529 Plan ownerships might have for those trying to qualify. For example, grandparent-owned accounts do not count toward FAFSA calculations, but parent-owned accounts do.

How much can you contribute? It depends on a few factors. The average investor will want to keep the annual gift tax exclusion in mind, which is $19,000 for 2026 per person. That means a married couple can give a single beneficiary as much as $38,000 combined this year. However, for married couples who want to front load contributions, that option exists as well. Those who exceed these annual gift tax limits or superfund will have to file gift tax returns as a result. See a summary below:

• Annual Gift Tax Exclusion—$19,000/per person for 2026
• Superfunding Limits—$95,000/per person per beneficiary
  • Or, $190,000/per person per beneficiary
  • Requires a gift return to be followed
• Aggregate Contribution Limit—Determined by your state
  • How much you can contribute to a plan for a single beneficiary over the lifetime of the account
  • Different than a balance limit

From a tax planning perspective, 529 Plans offer:

1. Income tax deductions or credits tied to contributions
→ Depending on your state & the state plan you use
2. Tax-deferred or tax-free growth
→ No potential taxation until withdrawn
3. Tax-free withdrawals
→ If used for qualified education expenses

Taxable accounts, on the other hand, have no contribution limits, but the tradeoff is the lack of tax advantages. When an investment appreciates and you sell it, you either pay short-term or long-term capital gains or losses. Investment income along the way, dividends or interest, are also taxable in the year they are received.

Therein lies the tradeoff. 529 Plans offer potential up-front tax benefits, tax deferral, and the potential for tax free distributions. Taxable accounts are taxable along the way, but give you the flexibility to avoid the 10% penalty if not used for qualified education expenses in the future. They can also be a source for future contributions, if needed.

Qualified Education Expenses

What is considered a qualified education expense? The most common expenses that come to mind are college tuition & fees, room & board, and certain supplies, but what else?

• College tuition & fees
• K-12 tuition & materials—$20,000/year cap for 2026
• Books & supplies—if required for courses
• Room & board—college only, half time enrollment minimum
• Computers & internet—college only
• Student loan payments—$10,000 lifetime limit per borrower

Your college or university will post their cost of attendance (COA) each year to serve as your guiding light for how much can be reimbursed for certain qualified expenses categories.

There are many more like K-12 tutoring and standardized tests fees, but we wanted to list the most common expenses. Some are not as straightforward as they look either. For example, room & board when you live off campus is calculated differently. You have to use the college or university’s COA figure as the cap. That means if the rent, utilities, etc. exceed the COA, you can only use up to the cap from the 529 Plan. The rest, in theory, would come from a taxable account or another source.

That is oftentimes the biggest misconception. There are regular college related expenses that are not considered qualified in the eyes of the IRS for 529 Plans. Carefully planning around the target university’s COA helps reduce the chances of overfunding.

Rollover Options & Beneficiary Changes

So, what happens if you send your child through college and there’s a leftover balance? That’s a good problem to have, and one worth discussing.

First, you retain the right to change the beneficiary. To avoid the penalty or taxes, the new beneficiary must be an eligible member of the original beneficiary’s family. These eligible members include: siblings, parents, children, spouses, cousins, and potentially the account owner.

529 Plans can also be rolled over into Roth IRAs for beneficiaries with earned income. See the rules below:

• Account Age—The 529 Plan must be at least 15 years old
• Contribution Age—Contributions must be at least 5 years old before they are rollover eligible
• Rollover Caps—Subject to annual IRA contributions limits, $7,500 for 2026
• Lifetime Limit—$35,000 aggregate lifetime cap per beneficiary

Role of Taxable Accounts in Education Planning

529 Plan tax benefits can be great, so why would someone want to pair a 529 Plan with a taxable account? Reason one, they are unsure if their child will have an interest in going to college. Maybe, they decide to go the trade school route instead at a much lower cost or start a business and forgo schooling all together.

That dovetails into reason number two, the fear of “overfunding” the account. For those who take distributions from 529 Plans for non-qualified education expenses, you are subject to a 10% penalty plus regular capital gains taxation. This is a risk for those who are super focused on optimizing. However, the flaw with that mindset is that the child’s decision is an unknown variable that can be difficult to predict. If done proactively, the planning starts at birth. Instead, the focus should be making informed decisions, and not fretting variables you cannot control.

The benefit of the taxable account is twofold. One, the optionality to make further 529 plan contributions down the line when they are needed, or two, to cover non-qualified expenses. Beyond that, the assets can easily pivot to working towards other financial goals instead. They provide flexibility, because if your child does go to trade school, or starts his/her own business, you can avoid the 10% penalty and the associated taxes to access the capital.

Myth or Fact: 529 Plan Edition

1. 529 Plans are scam—MYTH. Believe it or not, we have heard this before just like we sometimes hear it with 401(k) plans. In short, if you have an education related financial goal like paying for K-12 tuition, college, or trade school, then 529 Plans are not a scam. They can offer immediate and long-term tax benefits when used for qualified educational expenses.

2. Overfunding is a real risk—FACT. While 529 Plan overfunding is a real risk, the important takeaway is to not obsess over a variable you may not be able to control. If education is important to you, funding a 529 Plan may be a priority. Focus on the target university’s cost of attendance and the projected growth rate of those costs. However, if your child decides to go another route, you still have options.

3. I can only invest in my own state’s 529 Plan—MYTH. However, if you want the tax deduction or tax credit for specific states, you may need to use your state’s plan. Understanding the tax parity rules and rules that apply to your state is important.

4. If there is a leftover balance in a 529 Plan, you have to take the 10% penalty—MYTH. Optionality exists to either change the beneficiary to an eligible member, or rollover the balance over time to a Roth IRA for the beneficiary.

Education planning has become more than just basic K-12 and college tuition planning. Given recent changes, and the nuances, there is chance you are leaving money on the table when it comes to this area of financial planning.

With school starting back up, right now represents a great opportunity to review your education plan from a financial perspective. It also offers an opportunity to remind parents that qualified expenses must be reimbursed in the calendar year they are incurred. Do not forget!

DISCLAIMER
The information provided does not constitute legal, tax, or financial advice. Before making any investment or financial decisions, you should consult with a qualified attorney, tax advisor, or financial professional who can consider your individual circumstances.

SOURCES
+ Fidelity Investments, 529 Plan Basics (Jan. 2, 2026), fidelity.com.
+ MassMutual, Understanding 529 Prepaid Plans Versus 529 Savings Plans (Sept. 18, 2023), massmutual.com.
+ Education Data Initiative, Average Cost of College Over Time: Yearly Tuition Since 1970 (Sept. 23, 2025), educationdata.org.
+ Saving for College, 529 Qualified Expenses: What Can You Use 529 Money For? (June 12, 2026), savingforcollege.com.
+ TIAA, The New Rules That Have Money Rolling Into 529 Accounts, tiaa.org
+ JP Morgan, College Planning Essentials: 2026 Edition. https://am.jpmorgan.com/us/en/asset-management/adv/investment-strategies/college-planning-essentials/