The Internal Revenue Code Section 529 offers qualified tuition programs, commonly known as 529 plans, to enable families to access a tax-advantaged education savings plan. Two basic 529 plans use prepaid tuition to allow families to purchase tax-free college credits at current prices. These serve as a hedge against inflation since tuition for credits is guaranteed, whatever the intervening increase in the cost of education. However, the IRS limits their use to a 529 plan-covered public university in the student’s home state.

In the most popular 529 savings plan, parents or guardians open a long-term investment account. The money is tax-deferred, with withdrawals tax-free as long as students use them for qualifying tuition, room and board, and text book purchases. If not applied to educational expenses, such plans are subject to income tax and a 10-percent penalty.

Since 2022, New Jersey has offered a tax deduction covering contributions of up to $10,000 per year among households that earn less than $200,000. While administrative fees offset these savings somewhat, it is a major incentive for many families.