Education Savings: Parents Abandon 529 Plans in Favor of AI

The rise of AI is fueling doubts among American parents about the value of a degree. With strategies diverging—some halting contributions, others shifting to more flexible accounts, or maintaining 529 plans while hoping for regulatory easing—there are signs of a broad reassessment.

529 Rules Already Eased and Uncertainty Even Among AI Leaders

529 plans have seen several recent expansions: in 2018, a portion of the funds became usable for private high schools. Six years later, it is now possible to transfer part of the savings to a Roth IRA tax-free, and graduate courses or certificates are now eligible. Despite these developments, the future remains hard to predict, even for figures in AI: when asked about the necessity of saving for college in 2025, Mustafa Suleyman, CEO of Microsoft AI, initially responded with a laugh, “probably not,” before clarifying that he didn’t know and that the situation was difficult to assess.

Families Cut Contributions, Betting on Post-College

David Graham, 52, stopped funding his children's 529 plans two years ago. He believes that college might still be worth the cost for his 12-year-old son, but not for his 8-year-old twin daughters, and anticipates challenges for universities due to declining birth rates. He says he has seen the advice to “learn to code” lose its relevance, appreciates the hybrid model of Alpha School that heavily relies on AI, and believes that AI tutors will lower educational costs. He estimates his son's 529 savings at $50,000 and each of his daughters' at $15,000, while stating he could fund their education by check if necessary, even if it means giving up tax benefits.

Seeking Flexibility: Taxable Accounts and Recommended Adjustments

Michael Reynolds, a financial planner in Indianapolis, observes that about 30% of the parents he advises are redirecting funds away from 529 plans and questioning the wisdom of concentrating everything in these plans. Omar Khan has opted for taxable brokerage accounts for his two children, accepting taxes on gains to preserve the option of using the savings for technical education, a real estate purchase, or starting a business. He believes that the value proposition of prestigious universities may diminish.

Continuing to Save While Hoping for a Redefinition of 529

Matthew Crowson, a 39-year-old physician and teacher at Harvard Medical School, maintains 529 plans for his 3- and 5-year-old sons but desires more flexibility. He notes that some of his best students are learning independently with AI tools before coming to ask questions and expects tuition fees to be challenged in light of the modest cost of a chatbot. He believes that if universities decline, the rules will need to evolve, hopes for an expansion of the definition of school—given that learning and continuing education are already eligible—and even a tax-free withdrawal regardless of use. In New York, advisor Eric Reale points out that there are already other possible uses for the funds beyond traditional college.

529 Plans Remain Strong but the Dynamics Change with AI

529 plans allow tax-free withdrawals for qualified educational expenses, and their adoption has increased: their number has grown by 80% since 2010, with the average balance more than doubling. At the same time, AI is shaking things up: it is being used for cheating, graduates are facing a hiring crisis attributed by many to AI, leaders assert that chatbots surpass human teachers, and Silicon Valley-inspired alternatives are multiplying. Collected testimonies describe reductions in contributions, transfers to more flexible arrangements, or the maintenance of 529 plans amid doubts about return on investment, while a survey of 921 K-11 parents reveals that just over a quarter are reconsidering how much to save and that 15% have already reduced their savings.

Between a Bet on AI Abundance and Rejection by Children

Some parents are betting on an impending abundance linked to AI and deeming college doomed, while others, like Matthew Seeger in Chicago, continue to save rigorously for their 3- and 5-year-old children to avoid a financial burden, all while worrying about the effects of AI on employment. In terms of usage, 9 out of 10 children have already used AI, but only 26% believe it will have a primarily positive effect on their lives. On the ground, David Graham's 12-year-old son says he only uses it occasionally, and his father claims that his children hate AI. More broadly, parents are revising their choices: some are moving away from 529 plans, while others are maintaining them while anticipating adjustments, like Nataliya Konovalova, who, after mobilizing relatives and birthdays for her 8- and 10-year-old sons' 529 plans, began to doubt the value of a degree in the age of AI, discussed the entry-level job market with her husband, halved her contributions, and considers a traditional four-year degree unlikely.