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A Brief History of 529 Plans

Updated: Dec 27, 2022


The History of Section 529 Education Savings Plans by Edusave


529 plans derive their name from

§ 529 of the Internal Revenue Code (IRC). Section 529 was added to the IRC in 1996 and has since evolved into the most effective means of saving for education at all levels. As with many pieces of federal legislation, however, § 529 has its origins in the states which served as the incubator for these innovative plans.

Late 1980s:

Several states began exploring ways to help families save for education. The policy considerations driving these initiatives were obvious: The cost of college education was growing at an annual rate higher than inflation, financial aid programs were shifting from grants to guaranteed student loans, and the number of college graduates entering the workforce saddled with debt was growing substantially.


Michigan established the Michigan Education Trust, the first prepaid tuition program in the country. Not long after, Florida launched its prepaid plan, now called the Stanley G. Tate Florida Prepaid College Program.


The Ohio Tuition Trust Authority was created with the express purpose of helping middle-income families save for college. The Ohio Prepaid Tuition Program was launched the following year.


The United States Court of Appeals for the Sixth Circuit ruled that the Michigan Education Trust, a state agency, was not liable for federal tax on investment income. The ruling prompted the states to increase their lobbying in Congress to obtain federal tax advantages for college savings programs.


Congress added § 529 to the IRC in 1996 enabling states to offer tax-deferred college savings plans. In the years following the introduction of § 529 nearly every state established a 529 program.


The Economic Growth and Tax Relief Reconciliation Act temporarily amended

§ 529 to allow account growth and withdrawals from 529 plans to be tax-free provided the funds are used for qualified higher education expenses.


The Pension Protection Act made the tax-free feature permanent.


The Tax Cuts and Jobs Act expanded the use of 529 plans beyond post-secondary education to allow up to $10,000 to be withdrawn annually to pay for K-12 tuition, a feature that has been adopted by thirty-seven states and the District of Columbia.


Section 529 was expanded further by the SECURE Act to include payments for apprenticeship programs as a qualified education expense. The SECURE Act also permits a lifetime limit of $10,000 to be withdrawn from a 529 plan without penalty to repay the student loan debt of the account beneficiary. An additional $10,000 for each of the beneficiary’s siblings can be withdrawn to repay their student loan debt as well.


Today forty-nine states and the District of Columbia offer at least one 529 plan with many states offering multiple plans to choose from. Most states partner with private sector companies to fulfill the program and investment management functions while retaining fiscal oversight and quality assurance.

Various incentives and programs have been created to encourage investment in 529 plans and promote education savings. For example, in addition to the potential for tax-free growth, most states offer individuals an income tax deduction or credit for contributions, and seven states offer similar tax incentives to employers for matching contributions. Several states contribute to the 529 account of eligible participants through matching grant programs. Some 529 programs award a “starter fund” to all newborns in the state with the money invested on the child’s behalf that can be claimed by him or her for qualified education expenses.

The Future of 529 Plans:

The history of 529 plans shows that Congress and the states are committed to a policy that promotes tax-efficient education savings programs. Section 529 of the IRC has evolved in response to feedback from the states that offer 529 Plans and the needs of Americans for whom education savings is a top priority. New proposals continue to be introduced to make 529 Plans more robust to combat rising education costs and avoid student loan debt. The future of 529 plans is bright.

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Unknown member
Nov 11, 2022

This is a really great overview and history of 529 plans. I always wondered why they were called "529" plans. Now I know. Thank you for this comprehensive overview!

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