How should you save for college?
For most of us, paying for a child’s college education requires years of dedicated savings and hard work. With a marketplace with many options to help you save for college, it can be a challenge to know which strategy is right for you.
What are the pros and cons of the different college savings vehicles? Find out here.
College savings by the numbers
- 56% of US workers prioritize saving for a child’s education1
- 58% of Americans believe four-year college is worth the cost1
- $28,953 Average amount Americans save in their 529 accounts3
529 plan4
The standard for college savings
A state-sponsored plan designed specifically to save for college
Pros
- Tax-free growth of both contributions and earnings
- Tax-free withdrawals for qualified education expenses
- Tax deductions or credits available in some states5
- No income or age limits
- High contribution limits and the ability to front-load contributions
- Flexibility to pay for a wide variety of education-related expenses
- Beneficiary can be changed if the original doesn’t use all the funds
- Given favorable status in Federal Student Aid calculations6
Cons
- Penalties for non-educational use of funds
- Limited investment options
- Investment performance may not be as strong as other options
- Limited to one beneficiary at a time
- Contributions over $17,000 per year are subject to the gift tax7
Whole life insurance
A powerful option that many overlook
In addition to a death benefit, whole life builds cash value that can help you pay for college8
Pros
- Cash value grows on a tax-deferred basis and withdrawals are generally tax-efficient.9
- Cash value can be used for anything at any time
- Unlike a 529 plan, whole life is insulated from market performance
The Federal Student Aid methodology doesn’t include life insurance cash value when calculating expected family contribution10
Cons
- Cash value takes time to accrue
- Withdrawals may be subject to tax penalties if you are younger than 59½
Coverdell ESA 11,12
A dedicated education custodial account
Lower contribution limits but more investment flexibility than 529s
Pros
- Tax-free growth of both contributions and earnings
- Tax-free withdrawals for qualified education expenses
- Wide range of investments available
- Flexibility to pay for a wide variety of education-related expenses
- Beneficiary can be changed if original doesn’t use all the funds
- Given favorable status in Federal Student Aid calculations[12]
Cons
- Low annual contribution limits
- Income limits — high earners may not qualify
- Contributions can only be made until beneficiary is 18 without tax penalty12
- All funds must be withdrawn by beneficiary by age 30 or be subject to income tax and a penalty tax12
Roth IRA13
A tax-advantaged retirement account
While intended for retirement, Roth IRAs can also help pay for college
Pros
- Tax-free growth of both contributions and earnings
- Tax-free withdrawal of contributions (but not earnings) at any time
- After age 59½, all funds can be withdrawn tax free
- Leftover funds can be used for retirement
Cons
- Low annual contribution limits ($6,500; $7,000 if age 50+)
- Income limits — high earners may not qualify
- Any earnings withdrawn before age 59½ are subject to taxes and penalties13, 14
- Withdrawals are counted as income and can affect financial aid status
Custodial account (UGMA/UTMA)15
A general-purpose account for gifting to a child
While not designed for education, a very flexible option for gifting funds
Pros
- Easy to set up and manage
- Can be opened at most financial institutions
- Two types: Uniform Transfer to Minors Act (UTMA) for transferring funds, and Uniform Gift to Minors Act (UGMA) for gifting a variety of assets, including stocks, bonds or life insurance
- Custodian has full control over the account
- Up to $2,300 in unearned income per year is untaxed or taxed at the child’s lower tax rate16
- No limits to how funds can be used
Cons
- No tax advantages after first $2,300 per year in unearned income16
- Counted as an asset for your child and so can affect financial aid status17
One key thing to remember when making your college savings strategy: there’s no need to choose just one approach. For example, you can combine a 529 savings plan and whole life insurance, paying for a portion of your child’s education using both.
A financial professional can help
Not sure which college savings strategy is right for you?
A financial professional can help! They’ll give you professional, unbiased perspective on how you can save for college and choose the savings vehicles that work best for your circumstances.
Brought to you by The Guardian Network © 2022, 2023. The Guardian Life Insurance Company of America®, New York, NY.
2023-154454 (4/25)