5 Alternatives to 529 Plans That Still Accelerate Your College Savings

Kali Hawlk

Updated on December 4, 2020

December 4, 2020December 4, 2020Save for CollegeBig Money Decisions, Featured, Spend Less1577Kali Hawlk

Editorial Note: This content is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the financial institution.

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If you’re saving for college, you might be familiar with 529 plans. A 529 college savings plan is a tax-advantaged account where you can save and invest money for future college tuition and qualified costs.

A 529 plan is usually the default strategy when saving money for college. But is it always your best choice? It’s important to evaluate your college savings options and explore alternatives to 529 plans before deciding which approach you’ll take to help pay for college when the time comes.

Specifically, let’s take a look at:

Pros and cons of using a 529 plan
Alternatives to 529 plans

The pros and cons of using a 529 plan

Benefits of using a 529 plan

There are a lot of great benefits to using a 529 plan to save for college. If you want to save your money in an account designed to help families create a financial plan to cover college costs, this option may be for you.

Funds in a 529 plan are exempt from federal taxes if the funds are used for qualified educational expenses.
Thanks to the Secure Act of 2019, qualified education expenses aren’t exclusive to college — you could employ the funds for private elementary, secondary or religious schools as well as apprenticeships, home schooling and even student loan debt repayment.
529 plans allow you to invest your savings, giving you the opportunity to earn a much better return on your money than if you were simply putting that cash in a savings account.
Friends and family members can make gift contributions to your account for birthdays, holidays or any other given time.
Unlike the traditional 529 plan, a 529 prepaid tuition plan allows you to lock in today’s tuition rates by paying upfront.

Drawbacks of using a 529 plan

Though there are many benefits to 529 plans, these plans also come with a few major disadvantages that just might push you toward 529 alternatives (see below).

You have to use them for qualifying educational expenses to be able to reap any tax benefits.
If the intended recipient of the savings doesn’t end up using the account, and you don’t have another child you could transfer them to, you’ll need to pay taxes and a 10% penalty fee on any earnings you take out and don’t use for qualified college expenses.
529 funds count toward that child’s assets and Expected Family Contribution (EFC) calculation for financial aid, potentially preventing a student from receiving need-based support in the form of grants, work-study programs and subsidized student loans.
Investment options within the plans can be extremely limited and may come with high fees.

5 Alternatives to 529 plans

Given the downsides, it makes sense to consider alternatives to 529 plans as well. The good news is that these plans are not the only options for college savers. Some 529 alternatives include using a custodial account, Roth IRA or Coverdell Education Savings Account.

Here are five of the most common alternatives to 529 plans you can use for your own college savings plan:

1. Savings accounts
2. Roth IRAs
3. Brokerage accounts
4. Custodial accounts
5. Coverdell Education Savings Accounts

1. Savings accounts

Rather than turning to a 529 plan, you can always opt to save for your child’s college expenses through other, more flexible savings products such as a regular savings account or certificate of deposit (CD).

Pros	Cons
You’re not bound to use them for the original purpose to reap tax benefits. Like some other 529 alternatives, if your child chooses not to go to college, there’s nothing stopping you from using your funds for other purposes, whether that’s helping them out with another venture or putting it toward your own financial goals. CDs offer some return on your investment, even if it’s not much.	Traditional savings account interest is typically much lower than other account APRs. This might make it harder to reach your savings goal as quickly. You’ll have easier access to your funds with a traditional savings account — beneficial if you have an emergency to tend to, but it could make it harder to stay on track with saving with such easy access to funds.

2. Roth IRAs

Another 529 alternative to put away money for college and invest it for a potentially larger return is to utilize an account intended for retirement, such as a Roth IRA. Roth IRAs are individual retirement accounts that allow people to save and invest after-tax money.

Pros	Cons
You can withdraw any of your funds without penalty after age 59 1/2. You can also withdraw your contributions to your Roth IRA without penalty at any time. Paying for college expenses for you, a spouse, your children or grandchildren is a qualifying reason to withdraw your investment earnings early without penalty. Plus, if your child decides not to go to college, you can put the funds toward your retirement instead.	Roth IRAs have contribution limits. You can only contribute up to $6,000 per year to your Roth IRA if you’re under the age of 50, and up to $7,000 if you’re older. At the end of the day, Roth IRAs are designed for retirement. They come with some Roth IRA rules and regulations that are intended to help people save for retirement and to keep their money in their accounts until retirement.

Pros

Cons

You can withdraw any of your funds without penalty after age 59 1/2. You can also withdraw your contributions to your Roth IRA without penalty at any time.
Paying for college expenses for you, a spouse, your children or grandchildren is a qualifying reason to withdraw your investment earnings early without penalty. Plus, if your child decides not to go to college, you can put the funds toward your retirement instead.

Roth IRAs have contribution limits. You can only contribute up to $6,000 per year to your Roth IRA if you’re under the age of 50, and up to $7,000 if you’re older.
At the end of the day, Roth IRAs are designed for retirement. They come with some Roth IRA rules and regulations that are intended to help people save for retirement and to keep their money in their accounts until retirement.

3. Brokerage accounts

Among alternatives to 529 plans, a brokerage account is a popular choice among more experienced investors. Brokerage accounts give you access to any investment that you’d like to buy or sell. These can range from stocks and mutual funds to bonds, currency and futures.

You can open a brokerage account through a broker. Options will vary depending on the company you choose to open an account with.

Pros	Cons
As with savings accounts, you can deposit and withdraw money in a brokerage account at any time without penalty. Some brokerage firms may offer you certain perks for opening an account with them, such as cash bonuses or a certain number of free trades.	There are no tax advantages of saving for college associated with brokerage accounts. You’ll also be responsible for capital gains taxes if your money earns a return. You may be hit with brokerage account fees, such as management fees on the account itself. Additionally, depending on what you invest in, you may incur commission fees, too. You may be required to make a minimum investment to open a custodial account. This would mean needing to start saving before even beginning to put your funds in a designated account.

Pros

Cons

As with savings accounts, you can deposit and withdraw money in a brokerage account at any time without penalty.
Some brokerage firms may offer you certain perks for opening an account with them, such as cash bonuses or a certain number of free trades.

There are no tax advantages of saving for college associated with brokerage accounts. You’ll also be responsible for capital gains taxes if your money earns a return.
You may be hit with brokerage account fees, such as management fees on the account itself. Additionally, depending on what you invest in, you may incur commission fees, too.
You may be required to make a minimum investment to open a custodial account. This would mean needing to start saving before even beginning to put your funds in a designated account.

4. Custodial accounts

If there’s a chance your child may not attend college, but you still want to plan for their future and support them financially, another 529 alternative is to utilize a custodial account. UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) are two common options.

Pros	Cons
Both offer standard tax breaks for individuals under age 18. The first $1,100 is tax-free, the second $1,100 is taxed at your child’s income tax rate and the remaining amount is taxed at the parent’s income tax rate. There are no restrictions on how the funds are used so long as they benefit the child. This will keep your child from losing your financial assistance even if they opt not to attend college.	You have less control over how your child uses the money. Once your child reaches the age of majority, you can’t legally prevent them from using the funds to take a vacation or buy a fancy car rather than for their education.

Pros

Cons

Both offer standard tax breaks for individuals under age 18. The first $1,100 is tax-free, the second $1,100 is taxed at your child’s income tax rate and the remaining amount is taxed at the parent’s income tax rate.
There are no restrictions on how the funds are used so long as they benefit the child. This will keep your child from losing your financial assistance even if they opt not to attend college.

You have less control over how your child uses the money. Once your child reaches the age of majority, you can’t legally prevent them from using the funds to take a vacation or buy a fancy car rather than for their education.

5. Coverdell Education Savings Accounts (ESAs)

A Coverdell Education Savings Account, or ESA, is similar to a 529 plan in that it allows you to put away savings for your child’s education when they are under age 18. Like with 529 plans (again, as of 2019), qualified educational expenses aren’t limited to college expenses.

Pros	Cons
You can use funds for primary and secondary education expenses, including private school tuition. As with a 529 plan, it can be easier to ensure these savings remain designated for educational expenses.	Unlike other 529 alternatives, you can only contribute up to a total of $2,000 per year to these accounts (no matter how many accounts you open). If your modified adjusted gross income is higher than $110,000 (or $220,000 on a joint filed tax return), you can’t establish one of these accounts.

Evaluate alternatives to 529 plans as you save for college

There are a lot of college savings options. But personal finance is personal, and using a certain account to save for college may make sense depending on your specific situation.

If you decide to turn to alternatives to 529 plans, consider consulting with a financial advisor who can explain the pros and cons of any option you consider. Ultimately, your best bet is to avoid regular savings accounts and CDs because the interest rates are typically very low. With other 529 alternatives, however, you can put your money to work and potentially earn a return by investing your savings instead.

If you’re saving for a child’s education and have a time frame of five to 18 years before those funds are needed for college, investing in a 529 plan, Roth IRA or brokerage account can help you maximize the cash you set aside for those future expenses.

Whichever method you choose, be sure you take the time to fully understand how your decision will affect your full financial future in the long term. Save successfully, and your family may be able to avoid federal and private student loan borrowing.

Andrew Pentis and Emilia Benton contributed to this report.

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Earnest Disclosures Interest Rate Disclosure Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.59% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions. Auto Pay Discount Disclosure You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay. Student Loan Refinancing Loan Cost Examples These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product. Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License. One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America. © 2021 Earnest LLC. All rights reserved. ³ Important Disclosures for Navient. Navient Disclosures 1. NaviRefi loans are made by Earnest Operations LLC, a member of the Navient family of companies, subject to individual approval and underwriting criteria. California residents only: Loans made or arranged pursuant to a California Finance Lenders Law license. Additional terms and conditions apply. – To qualify, you must be a U.S. citizen or non-citizen permanent resident of the United States, reside in a state we lend in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.navirefi.com/help-and-questions. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Loan terms are subject to eligibility. Approval and interest rate depend on the review of a complete application. Loan approval is subject to confirmation that your debt-to-income, free cash flow, credit history and application information meet the minimum requirements. You must have a minimum FICO score to be considered. – You can choose between fixed and variable rates. Fixed interest rates are 2.75% – 6.04% APR (2.50% – 5.79% APR with Auto Pay discount). Starting variable interest rates are 2.13% – 5.89% APR (1.88% – 5.64% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA. – You can take advantage of the 0.25% Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. 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Visit https://navirefi.com/lending-licenses for a full list of licensed states. ⁴ Important Disclosures for CommonBond. CommonBond Disclosures Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. ‍All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation. ⁵ Important Disclosures for SoFi. SoFi Disclosures Fixed rates from 2.74% APR to 6.74% APR (with autopay). Variable rates from 2.25% APR to 6.39% APR (with autopay). All variable rates are based on the 1-month LIBOR and may increase after consummation if LIBOR increases; see more at SoFi.com/legal/#1. If approved for a loan your rate will depend on a variety of factors such as your credit profile, your application and your selected loan terms. Your rate will be within the ranges of rates listed above. Lowest rates reserved for the most creditworthy borrowers. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license #6054612; NMLS #1121636 (www.nmlsconsumeraccess.org). Additional terms and conditions apply; see SoFi.com/eligibility for details. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. ⁶ Important Disclosures for LendKey. LendKey Disclosures Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. 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As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay. ⁷ Important Disclosures for Laurel Road. Laurel Road Disclosures All credit products are subject to credit approval. Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com. As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster. Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount. Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate. Interest Rate: A simple annual rate that is applied to an unpaid balance. Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%. 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These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.