What the New Tax Law Means for Funding Education

Dan McLennon is an attorney in Sophisticated Planning Strategies at Northwestern Mutual.

When the legislation commonly referred to as the One Big Beautiful Bill Act (OBBBA) was signed into law, it changed the way Americans will pay for education, from kindergarten through graduate school. Here’s an overview of those changes and how they may affect your family’s finances.

Two changes to K-12 funding

Here are two ways OBBBA will change funding for K-12 education and how it may impact you:

1. New federal voucher-style initiative

Key provisions in OBBBA create something akin to a federal school voucher program. It will offer a dollar-for-dollar tax credit for donations to nonprofit scholarship-granting organizations (SGOs). Those SGOs, in turn, will grant scholarships to fund private school tuition and certain private and public education expenses. Families who earn up to 300 percent of the median income in their county are eligible to receive these scholarships.

Middle-class families interested in private K-12 education who did not previously qualify for state voucher programs focused on low-income students may see the greatest change. And there may be opportunities for other families as well.

However, states must opt in to make the program available to residents and will have some control over how it’s run. Because voucher programs are politically contentious, it’s likely that access and rules will vary across the country.

2. More uses for 529 funds

For 529 plan education-savings accounts, the definition of qualified education expenses is expanding. Families will now be able to use 529 funds to pay for homeschooling supplies, some tech expenses, test fees and other costs in addition to tuition. The annual withdrawal limit for K-12 expenses is expanding as well; it will jump from $10,000 to $20,000 permanently in 2026. (It’s important to note that in Washington, D.C., “permanent” means that there is no expiration date. It does not mean that the laws can’t change down the road.)

Six changes to higher education funding

The impact on higher education funding is more dramatic. Here are six ways higher education funding is changing under the new law.

1. Changes to federal student loan programs

OBBBA will eliminate the graduate PLUS loan program and places new annual and aggregate limits on how much graduate students and their parents can borrow in federal student loans.

For both graduate and undergraduate students, repayment options have been pared back for federal student loans taken out in July 2026 or later. Rather than choosing among seven different repayment plans, borrowers will choose between the new, income-based Repayment Assistance Plan (RAP) and a standard plan with fixed payments.

2. More uses for 529 funds

The legislation also expands uses for 529 funds that apply to higher education. OBBBA expands the versatility of 529s by adding qualified training and credentialing costs for welders, plumbers, electricians, accountants, nurses, real estate agents and others to the list of eligible expenses.

3. Changes to Pell Grant eligibility

Pell Grants, which subsidize the undergraduate education of students with exceptional financial need, are also undergoing a similar transformation. Beginning on July 1, 2026 job training and certificate programs will qualify. Students who receive full-ride scholarships, however, will no longer be eligible. That creates a new funding opportunity for those pursuing a vocation, but it may limit options for high-achieving, lower-income students who rely on Pell Grants to help cover their living expenses.

4. Employer contribution programs made permanent

Under OBBBA, employers can continue to play a role in education funding. A pandemic-era benefit that allowed companies to provide up to $5,250 annually tax-free for an employee’s education expenses and student loan payments is now permanent. The limit will be indexed for inflation beginning in 2026.

5. ABLE account enhancements made permanent

Other temporary provisions made permanent by OBBBA are enhancements to ABLE accounts, which help people with disabilities save for a broad range of expenses, including education. These include an increased annual contribution limit for working beneficiaries who do not participate in a workplace retirement program and a nonrefundable Saver’s Credit of up to $2,100.

6. Creation of ‘Trump Accounts’

New Trump Accounts that parents can open for their children will offer a tax-advantaged investment opportunity similar to a traditional (non-Roth) Individual Retirement Account (IRA). And they may also play a role in funding higher education. Beneficiaries must wait until the year of their 18th birthday to withdraw funds. Once they reach that milestone, they will be able to withdraw funds without penalty for certain expenses, including certain qualified higher education expenses.

What does OBBBA mean for my education planning?

OBBBA represents a shift in the federal government’s educational strategy and priorities, placing new restrictions on some longtime sources of education funding while opening up several new opportunities. Your Northwestern Mutual advisor can help you navigate how these changes could impact your financial plan. Together, you can design a path forward to meet your education funding goals.

This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.