How to Navigate Cash and Cashlike Options in 529 Accounts

Money earmarked for college expenses follows a rhythm distinct from other savings goals. Investors in America’s 529 college savings plans typically spend about a dozen years pursuing growth. As enrollment looms, the priority quickly shifts to preserving the accumulated gains, and a larger portion of the portfolio moves to very conservative investments.

The current college savings landscape therefore features a mix of cashlike options—including money market funds, stable-value funds, and FDIC-insured savings accounts—each with distinct risk, liquidity, and return profiles. Below, we dive into each category and compare their characteristics, usage in 529 plans, and recent trends.

FDIC-Insured Options

While these accounts usually offer the lowest yield, they offer the strongest principal guarantee—an attractive trade-off for the most risk-averse savers.

Underlying Holdings: These portfolios sweep 529 cash into demand or savings deposits at partner banks. Interest accrues daily and is credited monthly.

Downside Protection: Principal and accrued interest are backed by the US government up to $250,000 per depositor, per bank.

Yield Determination: Rates are set by individual banks based on prevailing deposit rates, competition among banks, and overall monetary policy environment.

Current Yield: As of June 2025, the FDIC’s national-average savings rate sat at 0.38%—a fraction of the yield available from a money market fund.

Money Market Funds

Money market funds have long been a staple “cash” option in 529 plans. While they lack a federal guarantee, money market assets are nevertheless among the safest securities available. They generally offer 529 savers the best combination of transparency, market-rate income, and immediate liquidity.

Underlying Holdings: These are short-term, high-quality debt securities such as Treasury bills, commercial paper, and repurchase agreements.

Downside Protection: Securities and Exchange Commission rule 2a-7 requires money market funds to invest in high-quality, very short-term debt that repays at—or extremely close to—par in a matter of weeks. The rule also caps any single borrower at 5% of assets and requires sizable cash cushions—at least 25% convertible to cash overnight and 50% within a week—so routine redemptions don’t trigger fire sales. Daily mark-to-market pricing, stress tests, and a mandatory liquidity fee on heavy outflows further shift the cost of sudden withdrawals onto the sellers rather than the remaining shareholders. Together, these constraints leave little room for credit losses, interest rate shocks, or run-driven dilution, making it exceptionally hard for a fund’s $1 share price to slip.

Yield Determination: This is driven by short-term interest rates and market demand for liquidity. Before fees, yields on money market funds track the Fed’s overnight rate almost one-for-one.

Current Yield: The Crane 100 Money Fund Index tracks the seven-day yield of the 100 largest US taxable money market mutual funds. As of June 13, 2025, the yield stood at 4.1%.

Stable-Value Options

Over the past decade, many 529 plans have replaced money market funds with stable-value portfolios as their default capital preservation option. The low interest rate environment that persisted after the global financial crisis left bank deposits and money market funds yielding near zero, while stable-value options offered steady 2% returns. Demand accelerated in the late 2010s, and by 2025, more than 40 state plans offered a stable-value option.

These products provide a steady “crediting rate” that has historically outpaced money market yields, making stable-value portfolios a middle ground between lower-return cash options and more volatile bond funds for investors who seek capital preservation without giving up income. However, this comes with restrictions. For example, when you move money out of a stable-value option, you must wait for 90 days before you can move it into a competing option such as a money market fund or ultrashort bond fund.

Underlying Holdings: A traditional 529 funding agreement simply gives the plan a claim on the insurer’s general account, which is run like the rest of the company’s liability-matching portfolio. As a result, its mix typically looks much closer to a life insurer’s investment book than to a short-term bond fund—still overwhelmingly investment-grade but much less transparent than stand-alone funds because assets are commingled with the insurer’s broader obligations. Alternatively, several plans use separate account/wrap designs, which hold a diversified mix of high-quality, short- to intermediate-term bonds—including US Treasuries and agency notes, investment-grade corporates, and mortgage- and asset-backed securities.

Downside Protection: A group-annuity contract or funding agreement says the insurer will repay all contributions at book value plus a declared crediting rate. If the insurer remains solvent, the mechanism works. If it fails, the full mark-to-market loss is suddenly back on the investors. A stable-value “wrap” is an insurance contract that sits on top of a bond portfolio. One or more insurers (or banks) promise that authorized withdrawals—tuition payments, rollovers, rebalancing inside the plan—will be honored at the portfolio’s book value even if the underlying bonds are trading below that mark.

Yield Determination: For stable-value options backed by funding agreements, the insurer publishes a declared rate for the coming period (often 12 months, though some contracts reset quarterly). Once declared, that rate is guaranteed for the whole period. The yield on wrapped bond portfolios uses a simple formula that spreads (amortizes) any unrealized gain or loss over the bonds’ remaining life, so the impact shows up gradually instead of all at once. The rate is reset every month or quarter, drifting up as new, higher-yielding bonds replace older ones and drifting down when yields drop. Both the general-account and the wrapped-bond versions provide daily liquidity at book value, so from the accountholder’s perspective, the experience is the same.

Current Yield: Although stable-value portfolios generally offer higher yields than money market funds, that isn’t always the case. Today, the median stable-value option is paying a 2.7% annualized rate, significantly less than money markets. The discrepancy stems from the record 783-day yield-curve inversion that began in October 2022, during which short-term T-bill rates stayed above intermediate-term bond yields. Going forward, stable-value crediting rates are set to drift into the low-4% range over the next 12–18 months because the bonds inside these funds now yield well above the rates most investors are currently receiving.

How We Assess Cash and Cashlike Options in 529 Plans

Morningstar Medalist Ratings for 529 education savings plans aim to evaluate each plan’s menu holistically. When it comes to cash and cashlike options, Morningstar analysts are structure-agnostic, meaning we do not prefer stable-value to money market funds, or vice versa. Investors should evaluate the source of principal protection, each option’s yield relative to market rates, any transfer restrictions that could impede short-term spending needs, and the all-in cost that comes out of an already modest return.