Saving for your child’s college education can feel overwhelming, especially with rising tuition and many savings options available. Here’s a guide to the most popular and practical ways parents can set aside funds for higher education, including their key features, benefits, and important considerations for 2025.
1. 529 College Savings Plans
What is it?
A 529 plan is a state-sponsored, tax-advantaged investment account designed specifically for saving for education expenses. It’s the most popular and flexible option for many parents.
Key Features:
- Tax Benefits: Earnings grow tax-deferred, and withdrawals are federal tax-free when used for qualified education expenses (tuition, fees, room and board, books, computers).
- No Income Limits: Anyone can open and contribute, regardless of income.
- High Contribution Limits: Many states allow contributions up to $500,000 or more over the account’s life, with no annual limit.
- Control: The account owner (usually a parent) controls the funds, even after the child turns 18.
- Flexible Use: Funds can be used at almost any accredited college or university, some apprenticeship programs, and up to $10,000 toward student loan repayment.
- Rollover Option: New laws permit rolling up to $35,000 in unused 529 funds into a Roth IRA for the beneficiary, if the account is at least 15 years old.
- Portability: If your child doesn’t use the funds, you can change the beneficiary to another family member.
Considerations:
- Investment gains and losses depend on market performance.
- Some plans restrict your investment choices.
- States may offer additional tax breaks for residents using their home-state plan.
2. Coverdell Education Savings Accounts (ESAs)
What is it?
A Coverdell ESA is a tax-advantaged savings account for education expenses with more flexibility for K–12 costs but tighter contribution and income limits.
Key Features:
- Tax Savings: Investments grow tax-free, withdrawals are tax-free for qualified expenses (including K–12 and college).
- Contribution Limit: Only $2,000 per beneficiary per year.
- Income Limit: Parents must have an adjusted gross income below $190,000 (married) or $95,000 (single) to contribute the full amount.
Considerations:
- Lower contribution limits may not be enough to cover full college expenses.
- Must use the funds by age 30, or transfer them to another family member under 30.
3. Custodial Accounts (UTMA/UGMA)
What is it?
Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts are general-purpose custodial accounts you open in your child’s name, which can be used for education or any other expense that benefits the child.
Key Features:
- Flexibility: Funds can be used for any purpose—not just college.
- No Contribution Limits: No annual cap, but large contributions may have gift tax implications.
- Simple Ownership Transfer: Ownership is transferred to the child (typically at age 18 or 21).
Considerations:
- No specific educational tax advantages.
- Assets count as the child’s for financial aid purposes, which can reduce aid eligibility.
- The child gains full control at age of majority and can use the money however they wish.
4. Other College Savings Options
- Savings Accounts and CDs: Traditional savings or certificate of deposit accounts offer safety and liquidity but lack significant growth and may not keep up with tuition inflation.
- Mutual Funds/Brokerage Accounts: Offer investment flexibility but provide no education-specific tax benefits.
- U.S. Savings Bonds: Series EE and I bonds can be cashed for qualified education expenses and may have some tax benefits.
- Permanent Life Insurance: Some life insurance policies allow cash value loans for college, but these are usually better suited for larger or more complex planning needs.
Tips for Parents
- Start Early: Time gives your savings more chance to grow and benefit from compounding interest.
- Automate Contributions: Schedule regular deposits so your savings stay on track.
- Understand Each Option: Review state laws, tax rules, and financial aid impacts before committing.
- Revisit Regularly: Adjust your plan and contributions as your family or goals change.
Saving for college is a journey, but having a plan and using the right tools can make higher education more accessible and less financially stressful for your family.