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Simplified Guide to College Savings Options

Published: March 12, 2024

Simplified Guide to College Savings Options

When planning to save for college, whether for yourself or someone else, it's helpful to understand the different ways to set aside money. Three main types of accounts can help you save for college: 529 College Savings Plans, Education Savings Accounts (ESAs or Coverdell Accounts), and Custodial Accounts. Each option has its own set of benefits and drawbacks, and the best choice depends on your specific needs and goals.

1. 529 College Savings Plan

A 529 college savings plan is a state-sponsored investment plan that enables you to save money for a beneficiary and pay for education expenses. You can withdraw funds tax-free to cover nearly any type of college expense. 529 plans may offer additional state or federal tax benefits.

Learn More About 529 Plans

2. Coverdell Education Savings Account

Formerly known as an Education IRA, a Coverdell Education Savings Account (ESA), is a federally sponsored, tax-advantaged trust or custodial account set up to pay for qualified education expenses. Coverdell ESAs can be opened for any student who is under the age of 18 years. However, they have limits on how much you can make and contribute each year. Also, note that these accounts must be liquidated before the beneficiary turns 30. Accounts for beneficiaries with special needs generally are not subject to the age restrictions on contributions and withdrawals. 

Learn More About Coverdell Accounts

3. Custodial Accounts

While not solely intended for college savings, Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) custodial accounts can also offer an avenue to save for education. Like Coverdell ESAs, with an UGMA or UTMA, a parent, grandparent or other adult is custodian for the account and makes all the investment decisions until the account beneficiary reaches the age of majority.

The advantages of such accounts include the potential for investment growth, the absence of contribution limits tied to the donor's income, and the flexibility of using the funds for a variety of expenses beyond just higher education. However, contributors should be aware of the annual contribution caps, varying account fees, and the tax implications of withdrawals, which collectively represent important considerations in choosing this saving strategy.

Learn More About Custodial Accounts

College Savings Plan Alternatives

There are some college savings plan alternatives to consider, but most of them don’t have the same tax advantages up front or potential for tax-free growth. If you want to save for college but need to find an alternative to the traditional route, consider using a high-yield savings account, saving in a Roth IRA, or investing in a brokerage account.

  • High-Yield Savings Accounts are straightforward and accessible, but they lack tax advantages.
  • Roth IRAs allow after-tax contributions that can be withdrawn tax-free for college, offering both flexibility and the potential for growth.
  • Brokerage Accounts offer the most flexibility in investment options and withdrawals but come with potential tax implications.

Federal Resources for Planning

Leverage these resources for more in-depth information and planning tools:

  • The U.S. Department of Education’s Federal Student Aid website: This site offers comprehensive resources on preparing for college, types of aid, how to apply for aid, and managing loans. It’s a valuable resource for understanding the financial aid process and planning for college expenses.

Federal Student Aid

  • The College Savings Plans Network (CSPN): CSPN provides detailed information on 529 plans and other college savings options across all states. This resource can help you compare plans and understand the specific tax advantages and benefits available in your state.

College Savings Plans Network

  • The Securities and Exchange Commission’s (SEC) Introduction to 529 Plans: This page offers an overview of 529 plans, including how they work, their benefits, and things to consider before investing. It’s a great starting point for understanding these college savings accounts.

Introduction to 529 Plans

  • The Consumer Financial Protection Bureau (CFPB) Paying for College: The CFPB provides tools and information to help you compare financial aid offers, understand student loan options, and manage college expenses effectively.

Paying for College

  • The Internal Revenue Service (IRS) Education Tax Credits page: Here, you can learn about tax credits for education expenses, which can reduce the amount of tax you owe. Understanding these credits can help you plan your savings and expenses more effectively.

IRS Education Tax Credits

  • Understanding the Basics of a 529 Plan: In this course from the National Association of State Treasurers you'll learn about the benefits of a 529 plan and the role they play in helping an individual fund future education expenses—whether for a loved one or themselves.

Begin Online Learning Course

  • Scholarships: There are numerous local and national scholarships available to students. Do your homework and apply for as many as possible.

Department of Labor Free Scholarship Search

  • Grants: Grants are typically based on financial need, although families with higher incomes may also be eligible under special circumstances.

Learn More About Grants

  • Work Study: The Federal Work-Study Program permits eligible students to work on campus to help offset educational expenses and reduce loan obligations.

Learn More About Work-Study

Article information is intended for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice must be obtained on your own separate from this educational article.

Third-party websites are for educational purposes only. We don't endorse or control their content.

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