Broker Check

Options for College Savings

September 20, 2021

College can be a time of fun, exploration, self-discovery and learning for many a child (or grandchild), but for many that experience also comes at a steep cost.

In 2019-2020 the national average “sticker price” (tuition+fees) for a public four-year, in-state school was $10,560; and over double that for out-of-state[i]. For a private four-year institution, that figure jumps to about $37,650.00[ii], and that is before accounting for additional costs such as books, supplies, room and board (if applicable), and other miscellaneous expenses. Just between the school years 2008-09 and 2018-19, the cost of attending colleges at public institutions rose by 28%, and 19% at private institutions (figures adjusted for inflation)[iii].

Moreover, the cost of attending college is expected to continue along its steep upward trajectory, so that a child who is a toddler in 2021 can expect to have to pay $261,277 for a four-year education at an in-state public college (that’s approximately $65,000 per year), including tuition, fees, room and board[iv]. That is assuming, of course, that they complete their degree within four years which is becoming far less common.

So how does one fund a college education? There is always the option of financial aid and loans. The first rarely covers all expenses though, and the second can place a heavy burden on new graduates and/or their parents who will have to pay back the loans just as many of those graduates are beginning their careers. Parents can try to support college costs during their high earning years when children are in college. However, this may come at the expense of potentially falling short with retirement savings goals later.

A better solution may be instead to start early and take advantage of the benefits of time and compounding interest. So, what are the available options?

529 Plans

529 plans have become an increasingly popular option for college savings, as it offers a means of saving large amounts and investing funds in a tax-advantaged manner for the future college costs of a beneficiary[v]. These plans are state-sponsored and are offered in some form in 49 states and Washington D.C[vi]. The 529’s can be broken up into two main categories: College Savings Plans and Prepaid Tuition Plans[vii].

The first is essentially a tax-advantaged investment account that allows annual contributions of after-tax dollars up to the annual exclusion amount for that year[viii]. Those funds can then be invested in mutual funds, Target Date funds, and other investment products without incurring the taxes that you might from a standard individual investment account[ix]. These funds can then be withdrawn without paying federal tax (and in some cases state tax as well) to cover a variety of “qualified education expenses.”[x] This can include books, supplies, tuition, room and board[xi], and more recently up to $10,000 in student loans[xii]. Like the others that will be mentioned below, the existence of a 529 education savings plan may impact the student’s access to need-based financial aid, although this does vary from institution to institution.

A Prepaid Tuition Plan has its own distinct advantages, but may be more complicated. This option allows the contributor to essentially lock-in the cost of a determined number of academic periods or credits for the future at today’s price[xiii]. This essentially means, if we are to use the example above for a four-year public in-state school, that you can pay today’s approximate $10,560 per year in 16/17 years from now when tuition is expected to be $65,000 per year. This option obviously has its limitations though. To start with it is not offered in every state, nor is it accepted at every institution. Additionally, some plans will require you to pre-select an institution, which may present some difficulties if you prepaid for four years at Institution A and the student instead chooses to go to Institution B. In that case, as in the case with the student not electing to go to college at all, you may risk losing some, or all, of your money[xiv]. Additionally, the funds from a pre-paid tuition plan can only be used on tuition and fees, and not be used towards additional expenses[xv].

Before committing to a 529 plan, you should speak to a professional and make sure you consider all your options, and the risks that may be incurred.

Coverdell Education Savings Account (ESA)

ESA’s, like 529’s, can be set up specifically to help cover the costs of “qualified education expenses” for a beneficiary. Rather than being sponsored by the state though, they are opened at banks or brokerage firms and allow the money to grow tax-deferred until the time of withdrawal[xvi]. If the withdrawals are used for qualified education expenses, then those withdrawals are not federally taxed, and not usually state-taxed[xvii].  Note: If the funds are withdrawn for non-qualified expenses, any untaxed earnings are taxable to the beneficiary, along with a 10% federal penalty. However, where they differ significantly though is that contributions cannot be made after the child reaches the age of 18 (except when the child has special needs) and has an annual contribution limit of $2,000[xviii]. To be clear, the student can have more than one Coverdell ESA, but even with more than one, the total annual contribution to the child must not exceed $2,000[xix].

Custodial Accounts

Custodial accounts such as UTMA’s and UGMA’s which can allow you to put money into an account in trust for the benefit of a minor[xx]. As the trustee of the account, you would manage the account up until the child reaches the age of majority (18 or 21 depending on the state you live in)[xxi]. Unlike 529’s and ESA’s, custodial accounts are more similar to a non-qualified / non-retirement investment account and once the beneficiary reaches the age of majority they can withdraw, contribute or continue to invest funds without any restriction or penalty for non-education expenses.

It is important to note, that once the child reaches the age of majority the assets fall under their complete ownership. This means that large accounts may inhibit the student’s access to financial aid[xxii].

Traditional and Roth IRA’s

While this is an available option, this may not necessarily be the best option. While in general, withdrawing from your IRA before you turn 59 ½ years old incurs a 10% penalty on top of any income taxes, it is possibly to circumvent that penalty if the withdrawal is to pay for “qualified higher education expenses” for yourself, your spouse, your children or your grandchildren[xxiii]. Depending on the account, you may still have to pay income taxes on the withdrawal, but you can avoid the penalty.

HOWEVER, be aware that pulling funds from your own retirement accounts can put a strain on your finances when you are in retirement, and unless you are working you may not be able to replace those funds. There is also the risk that as the withdrawals adds to your taxable income, it may affect the students access to need-based financial aid[xxiv].

Before making the decision to withdraw from your own retirement accounts, you should speak to a financial professional to see if this is the best solution for you and the student.


Saving for your child’s (or grandchild’s) future education expenses can be a major undertaking, especially with the rising costs of attending higher education institutions, as well as navigating the complex restrictions and benefits of each of the options above. Planning for the best option(s) for the child should be done with the assistance and counsel of a financial professional, as well as your tax professional, to ensure the best results. If you have questions about providing for your child’s future education expenses, please contact us.


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