529 Plan vs HELOC: Which Is Better for College Funding?

Meta Title: 529 Plan vs HELOC for College: Complete Comparison (2026) Meta Description: Should you save in a 529 plan or use home equity for college? Compare tax benefits, flexibility, and when each option makes sense. Keywords: 529 vs HELOC, college savings vs home equity, 529 plan benefits, HELOC for college

---

Two popular ways to fund college: save in a 529 plan, or tap your home equity when tuition bills arrive.

They're fundamentally different approaches — one is proactive saving, the other is reactive borrowing. But many families end up using both.

Here's how to think about each.

The Fundamental Difference

529 Plan: You save and invest money over time. Earnings grow tax-free. Withdrawals for education are tax-free.

HELOC: You borrow against home equity when you need it. You pay interest. No tax benefits for education expenses.

One builds wealth. One borrows wealth. That distinction matters.

529 Plan: The Advantages

Tax-free growth. Unlike a regular brokerage account, investment gains aren't taxed when used for education. Over 18 years of compounding, this is substantial.

State tax deductions. Many states offer income tax deductions for 529 contributions. In high-tax states, this is worth thousands.

No income limits. Anyone can contribute to a 529, regardless of income.

Gift tax benefits. You can superfund five years of gifts ($90,000 per beneficiary) in one year without gift tax consequences.

Financial aid treatment. Parent-owned 529s are assessed at only 5.64% in the FAFSA formula, less impactful than many other assets.

529 Plan: The Limitations

Penalties for non-education use. If your child doesn't go to college (or gets a full scholarship), you'll pay income tax plus 10% penalty on earnings when withdrawing.

Limited investment options. You're stuck with the funds offered by the plan. No individual stock picking.

State plan complexity. Your state's plan might not be the best. Evaluating across states is confusing.

Locks up funds. Money in a 529 is mentally (and practically) earmarked. It's not available for emergencies without penalty.

Potential over-funding. If costs drop or scholarships appear, you might have excess funds facing penalties.

HELOC: The Advantages

Flexibility. Draw exactly what you need, when you need it. No over-funding risk.

Lower rates than private loans. HELOC rates typically beat private student loans and Parent PLUS loans.

No time pressure. You don't need to start 18 years before college. Equity built naturally over time.

Multi-purpose availability. The same HELOC can fund college, renovations, or emergencies. One flexible credit line.

Interest-only option. During the draw period, you can pay interest only, preserving cash flow while your child is in school.

HELOC: The Limitations

Your home is collateral. Default and you could lose your home. Student loans can't take your house.

No tax benefits for education. Home equity interest is only deductible when used for home improvements.

Variable rates. HELOC rates fluctuate with the market. Four years of college could see significant rate swings.

Requires equity. You need to have built home equity first. Not an option for new homeowners.

Competes with retirement. Using home equity for college could compromise your retirement security.

The Math: $50,000 Example

Scenario A: Save $50,000 in a 529 over 18 years

Starting at birth, contributing $150/month at 7% average return:

• Total contributed: $32,400
• Growth: $17,600
• Tax saved on growth (assuming 22% bracket): $3,872
• State tax deduction value (varies): $0-$3,000
• Net cost to you: ~$29,400 for $50,000 in education funds

Scenario B: Borrow $50,000 via HELOC when college starts

HELOC at 8% over 10 years:

• Monthly payment: $606
• Total paid: $72,720
• Net cost to you: $72,720

The 529 plan delivered $50,000 for ~$29,400. The HELOC cost $72,720.

That's not a close call. Tax-advantaged compounding wins.

When 529 Plans Are Better

You have 10+ years until college. Time for compounding to work.

You're in a high-tax state. State deductions add up.

College is very likely. Your child is academically inclined, you value education, multiple children can use the funds.

You have predictable income. Monthly contributions fit your budget.

You're maxing retirement contributions. 529 comes after 401(k) match and Roth IRA.

When HELOC Makes More Sense

You started too late. 529 needs time. If college is 2-3 years away, HELOC may be your only option.

Uncertainty about college. If your child might not attend or might get significant aid, HELOC avoids the over-funding risk.

You need flexibility. Major career change, business opportunity, or financial uncertainty makes locked-up 529 funds risky.

State offers no deduction. Without state benefits, 529 advantage shrinks (though federal tax-free growth still matters).

Home equity is substantial. If you've built significant equity and have other retirement savings, HELOC provides optionality.

The Hybrid Approach: Best of Both

Most families benefit from both:

1. Start a 529 early — Even $50-100/month adds up over 18 years
2. Set realistic target — Aim for 2-3 years of public school tuition, not full ride at Harvard
3. Leave HELOC as backup — Build home equity naturally through mortgage payments
4. Fill gaps with HELOC — Use home equity for whatever the 529 doesn't cover

This approach captures 529 tax benefits while maintaining flexibility for the unknown.

The Over-Funding Problem (And Solutions)

Worried about having too much in a 529? Options exist:

• Change beneficiary — Transfer to siblings, cousins, or even yourself for future learning
• Roth IRA rollover — As of 2024, up to $35,000 can roll to beneficiary's Roth (with limitations)
• Pay for non-degree education — Trade schools, bootcamps, and apprenticeships may qualify
• Scholarship exception — If the beneficiary gets a scholarship, you can withdraw that amount penalty-free (still pay tax on earnings)

The over-funding fear is usually overblown. College costs keep rising. More common problem: not enough saved.

Financial Aid Implications

529 Plan (parent-owned): Assessed at 5.64% in FAFSA Expected Family Contribution. $50,000 in 529 = ~$2,820 reduction in aid eligibility.

Home Equity: Not counted in FAFSA at all. However, some private schools use CSS Profile, which does consider home equity.

If you're applying to FAFSA-only schools and expect need-based aid, home equity is technically more "hidden." But don't let financial aid tail wag the savings dog.

Our Recommendation

Start a 529 as early as possible, even with small amounts. Tax-free compounding is too powerful to ignore.

Build home equity naturally through regular mortgage payments and home appreciation.

Use HELOC to fill gaps when tuition bills exceed 529 savings and federal student loans.

Never deplete home equity for education. Your housing security matters more than any degree.

---

Next Steps

Calculate your college savings gap to see how much you'll need. Then check your current home equity to understand your backup options.

---

Last updated: February 2026