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 to saving money for college. But is it always the 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:
The pros and cons of using a 529 plan
Alternatives to 529 plans
Evaluate your college savings options outside a 529 plan
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. You can also make the most of this saved money because funds in a 529 plan are exempt from federal taxes if the funds are used for qualified educational expenses.
Another upside of 529 plans is that they 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. Another big plus is that friends and family members are able to make gift contributions to your account for birthdays, holidays or any other given time.
What’s wrong with a 529 plan?
Though there are many benefits to 529 plans, these plans also come with a few major disadvantages.
For starters, one of the biggest downsides is that 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 attending college, 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.
Additionally, unlike with other savings vehicles, a 529 plan must be used strictly for college expenses. You can’t use them for private secondary school tuition, for example. Plus, 529 funds count toward that child’s assets and Expected Family Contribution (EFC) calculation for financial aid. Depending on where you live, this could prevent students from receiving need-based aid.
Another drawback of 529 plans is that the investment options within the plans can be extremely limited and may come with high fees. Without a professional who can help guide you, understanding the right financial moves to make can be tricky, and mistakes can cost you money.
Alternatives to 529 plans
With the downsides of 529 plans, it makes sense to consider other college savings options as well. The good news is that these plans are not the only options for college savers. Some examples 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
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
- You’re not bound to using them for the original purpose to reap tax benefits. Unlike with 529 plans, 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 it it’s not much.
Cons
- Traditional savings accounts typically earn much lower Interest rates. 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 option 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
- 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.
Cons
- 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
Another alternative option is to utilize a simple brokerage account to save for college. 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
- 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.
Cons
- There are no tax advantages 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 option is to utilize a custodial account. UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) are two common options.
Pros
- Both offer standard tax breaks for individuals under age 18. The first $1,000 is tax-free, the second $1,000 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.
Cons
- 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. The key difference is that with this account, qualified educational expenses aren’t limited to college expenses.
Pros
- 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.
Cons
- You can only contribute up to $2,000 per year to these accounts.
- 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 your college savings options outside a 529 plan
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 usually very low. 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 timeframe 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.
Emilia Benton contributed to this report.
Interested in refinancing student loans?
Here are the top 7 lenders of 2019!| Lender | Variable APR | Eligible Degrees | |
|---|---|---|---|
| Check out the testimonials and our in-depth reviews! 1 Important Disclosures for Earnest. Earnest DisclosuresTo qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application. Earnest fixed rate loan rates range from 3.45% APR (with Auto Pay) to 6.99% APR (with Auto Pay). Variable rate loan rates range from 1.81% APR (with Auto Pay) to 6.49% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate 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 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of November 6, 2019, and are subject to change based on market conditions and borrower eligibility. Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance. The information provided on this page is updated as of 11/06/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at hello@earnest.com, or call 888-601-2801 for more information on our student loan refinance product. © 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America. 2 Important Disclosures for SoFi. SoFi Disclosures
3 Important Disclosures for Laurel Road. Laurel Road DisclosuresLaurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association. ANNUAL PERCENTAGE RATE (“APR”) FEE INFORMATION There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account. LOAN AMOUNT For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans. ELIGIBILITY & ELIGIBLE LOANS Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements). Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment. All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions. For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned. INTEREST RATES The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency. DISBURSEMENT OPTIONS The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired. POSTPONING OR REDUCING PAYMENTS 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. We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends. We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment. If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments. KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. This information is current as of November 8, 2019 and is subject to change. 4 Important Disclosures for Splash Financial. Splash Financial DisclosuresTerms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. 5 Important Disclosures for CommonBond. CommonBond DisclosuresOffered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). 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 1.9299999999999997% effective October 10, 2019. 6 Important Disclosures for LendKey. LendKey DisclosuresRefinancing 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. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution. Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810. As of 11/07/2019 student loan refinancing rates range from 1.79% to 8.65% Variable APR with AutoPay and 3.49% to 7.75% Fixed APR with AutoPay.
7 Important Disclosures for College Ave. College Ave DisclosuresCollege Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply. 1College Ave Refi Education loans are not currently available to residents of Maine. 2All rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation. 3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. 4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. Information advertised valid as of 09/23/2019. Variable interest rates may increase after consummation. |
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 | 1.81% – 6.49%1 | Undergrad & Graduate | |
 | 1.81% – 5.98%2 | Undergrad & Graduate | |
 | 1.99% – 6.65%3 | Undergrad & Graduate | |
 | 2.43% – 7.60%4 | Undergrad & Graduate | |
 | 2.02% – 7.09%5 | Undergrad & Graduate | |
 | 1.79% – 8.65%6 | Undergrad & Graduate | |
 | 2.74% – 6.24%7 | Undergrad & Graduate | |
