FOR PARENTS, FEW FINANCIAL GOALS are as important — or as daunting—as saving for your child’s college education. But fear not! In this guide, we’ll break down the most popular college savings options, explain their pros and cons, and give you actionable tips to make the most of each one.

How much should you save?

According to the College Board, for the 2024 academic year, the average cost of public, in-state tuition and fees is around $11,260 per year. Add room and board, and you’re looking at roughly $30,000 per year. If you’re aiming for a private school, that number jumps to around $60,000 per year. That means the total cost of a four-year degree at a public in-state school is approximately $120,000, while a private school could cost upwards of $240,000.

To add to the challenge, tuition costs are projected to rise by about 6% per year. A financial adviser can help you crunch the numbers based on your investment growth rate, your child’s college preferences and other personal factors.

Where should you save?

The next step is figuring out where to put that money. The main factors to consider when choosing an option are:

• Are there any tax advantages that can help your money grow faster?
• Will this account reduce your child’s chances of receiving need-based financial aid?

Let’s explore the most popular options.

529 savings plans

One of the most well-known and flexible college savings options is the 529 savings plan. Anyone can contribute to a 529 plan, making it accessible to all income levels. Contributions grow tax-deferred, and withdrawals for qualified education expenses (such as tuition, room and board, and books) are tax-free. In some states, contributions may also qualify for state tax deductions or credits. Under the 2018 Tax Cuts and Jobs Act, 529 funds can now be used for K-12 private and public school tuition, as well as for a beneficiary’s future Roth IRA rollover.

These plans are considered parental assets, which is favorable for financial aid calculations. Only up to 5.64% of parental assets are expected to go toward education, compared to 20% of assets in the student’s name.

With their great combination of tax benefits and flexibility, 529 plans are a top choice for many families.

Prepaid tuition plans

Prepaid tuition plans let you purchase future tuition at today’s rates (plus fees), helping you avoid rising education costs. Most prepaid plans are state-sponsored and may only cover in-state public universities.

While prepaid tuition plans are a good hedge against inflation, their lack of flexibility—particularly if your child decides to attend a school that doesn’t participate—makes them less appealing than 529 savings plans.

ABLE Accounts (529A)

If your child has a disability, an able (Achieving a Better Life Experience) account is a great way to save for both education and other essential expenses without impacting eligibility for government benefits. Similar to 529 plans, able accounts offer tax-deferred growth and tax-free withdrawals for qualified expenses.

Contributions up to $18,000 per year won’t affect eligibility for Social Security Disability Income, and up to $100,000 in the account won’t disqualify your child from receiving Supplemental Security Income (ssi).

Coverdell Education Savings Accounts (ESA)

Coverdell esas are another tax- advantaged savings vehicle for education, though they come with more limitations than 529 plans. Contributions phase out if your

adjusted gross income (agi) exceeds $110,000 for single filers or $220,000 for married couples.

You can only contribute up to $2,000 per year, per beneficiary, making it difficult to accumulate significant savings. Withdrawals for qualified education expenses are tax-free, but Coverdell accounts don’t qualify for certain tax credits, like the American Opportunity Credit (which also has an income limit).

UTMA/UGMA custodial accounts

The Uniform Transfers to Minors Act (utma) and Uniform Gifts to Minors Act (ugma) accounts allow you to transfer assets to your child’s name, giving themcontrol over the funds once they reach the age of majority (18 or 21, depending on the state).

Unfortunately, these accounts are considered the child’s assets, which can reduce their eligibility for financial aid. Up to 20% of the account balance is expected to be used for education.

While utma and ugma accounts give parents more flexibility over what the funds can be used for (not just education), the negative impact on financial aid makes them less desirable for most families focused on college savings.

Standard brokerage accounts

If you want complete flexibility, a standard brokerage account may be an option. While it doesn’t offer the tax benefits of a 529 plan, it gives you full control over the investments and how the money is used. There are no restrictions on how much you can contribute or your income level.

You can invest in a wide range of assets, including stocks, bonds, and mutual funds, which gives you more control over your investment strategy. You’ll pay taxeson dividends and capital gains, but you can manage this by controlling when and how you sell your investments. While you’ll miss out on the tax-free growth offered by 529 plans, a brokerage account provides maximum flexibility if your child’s education plans change.

Series EE or I bonds

These government-issued bonds are a low-risk way to save for education. The interest earned on Series ee and I

bonds is tax-free if used for qualifying education expenses, but only if your income falls below a certain threshold. If you prefer a conservative investment strategy, these bonds can be a good way to diversify your college savings, though they won’t offer the higher growth potential of a 529 plan. Also, most doctors are phased out of the tax

advantages of these bonds due to income limits.

2503(c) trusts

A 2503(c) trust is an irrevocable trust designed to provide for education expenses. The funds are considered the beneficiary’s asset, which can adversely affect student aid eligibility. Income generated by the trust is subject to the Kiddie Tax, making it less tax-efficient than other options.

IRAs

ira early withdrawal penalty fees are waived if the withdrawal is used for qualifying educational expenses. However, withdrawals are still subject to income tax. Thisoption should be the very last resort, as students can borrow for education, but parents can’t borrow for retirement.

Conclusion

Saving for college can feel like a monumental task, but with the right strategies in place, it’s achievable. By taking proactive steps now, you can help your childgraduate with as little debt as possible and set them — and yourself—on the road to financial freedom. •