Key Takeaways
- Recent legislative changes have modified certain education funding provisions.
- If you have a goal of paying for a loved one’s education expenses, it’s important to revisit your strategy and stay on top of changes.
- There are several strategies that can help optimize your education funding efforts in 2026 and beyond.
If your financial goals include covering the cost of a child’s or grandchild’s education, you’ll need a plan in place to help you get there. The sooner you start saving, the better your chance of achieving your education funding goals — yet even those who have been saving and planning for years must regularly review their strategies to help ensure they continue to meet their needs.
Tuition costs typically go up faster than normal consumer inflation, so now’s an especially good time to review your education funding strategies to keep up with recent legislative changes.
New Education Funding Considerations
President Trump’s One Big Beautiful Bill Act (OBBBA), which was signed into law on July 7, 2025, made changes to several education funding provisions, as outlined below.
529 savings accounts
The OBBBA expanded the use of 529 education savings plans to cover the cost of skilled trade and workplace preparation programs. This supports students who wish to pursue careers in fields such as manufacturing, construction, welding, plumbing, etc.
The OBBBA also expanded the use of 529 plan funds to include qualified K-12 expenses, such as books and tutoring as well as specialized therapy for students with disabilities.
Student loan repayment
Beginning on July 1, 2026, income-driven repayment options may no longer be available. New borrowers will need to choose between a standard repayment plan or a repayment assistance plan (RAP).
Pell Grants
Beginning on July 1, 2026, students who receive scholarships or grants that cover their full education costs will no longer be eligible to receive Pell Grants. On the other hand, there are some income adjustments and reporting exclusions that may be beneficial to some applicants that are worth exploring.
School choice tax credits
The OBBBA established a new federal tax credit to support donations to organizations that offer scholarships for private K-12 education expenses. While not available until 2027, these credits achieve two things: first, they offer a tax deduction for donors to a scholarship granting organization (SGO), and second they can help defray the cost of attendance for students who qualify.
Saving for College in 2026
The following education planning strategies can help optimize your savings potential in 2026 and beyond.
529 college savings accounts
529 college savings plans provide a tax-advantaged way to save for a loved one’s education expenses. 529 plan contributions grow tax-deferred within the account, and withdrawals for qualified education expenses are exempt from federal — and, often, state — income tax. Plus, many states offer tax deductions or credits for contributions made to the state’s 529 plan.
Custodial accounts (UGMA/UTMA)
Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts are types of custodial accounts that allow parents to save money for their children’s benefit. The funds can be held in either a bank account or an investment account, and these accounts are specifically designated for a child’s use, but funds aren’t limited to education expenses.
These accounts can be a great way to save if you would like to support your child’s education but are unsure whether they’ll attend college or a trade school.
However, unlike 529 accounts, UGMAs and UTMAs don’t offer tax-advantaged savings. Contributions aren’t eligible for a tax deduction or credit, and the account’s earnings are taxable. Also, funds held within a custodial account can impact your child’s eligibility for need-based financial aid, as up to 20% of the account balance can be considered when calculating your Free Application for Federal Student Aid (FAFSA) estimated family contribution.
Coverdell education savings accounts (ESAs)
A Coverdell ESA allows you to contribute up to $2,000 per child per year until that child reaches age 18. The funds can be used to pay for qualified education expenses, such as books, supplies and tuition, for kindergarteners through college students.
Funds held within a Coverdell ESA are exempt from federal taxes, and they can be invested in a wide range of investment options, including individual stocks and bonds. In contrast, 529 account investments are typically limited to mutual funds.
The downside to Coverdell ESAs is that they have a relatively low income cap. You can’t contribute to a Coverdell ESA if your modified adjusted gross income (MAGI) exceeds $110,000 as an individual or $220,000 as a married couple filing jointly.
Prepaid tuition plans
A prepaid tuition plan is a type of 529 savings account that allows you to pay for your child’s future college tuition costs at today’s rates. Doing so can lead to significant savings, given the rapid rise of tuition costs over the last few years. Most states have relatively high caps on the amount that can be contributed to a prepaid tuition plan, which range from $235,000 to more than $500,000.
The downside to this approach is that prepaid tuition arrangements are typically only accepted by certain colleges within a particular state. Also, money can only be used for tuition, not other expenses such as fees, room and board, books and supplies, etc.
A prepaid tuition plan typically only makes sense if your child is certain he or she will attend an in-state school that honors such a plan.
