5 Alternatives to 529 Plans That Still Accelerate Your College Savings

 December 4, 2020
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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:

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.

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.

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.

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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1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms 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. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 4, 2022.


2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.

Earnest Disclosures

Student Loan Refinance Interest Rate Disclosure Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.99% APR to 8.24% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.99% APR to 8.24% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 8.95% if your loan term is 10 years or less. For loan terms of more than 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%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Let us know if you have any questions and feel free to reach out directly to our team.


3 Important Disclosures for SoFi.

SoFi Disclosures

Fixed rates range from 3.49% APR to 7.99% APR with a 0.25% autopay discount. Variable rates from 1.74% APR to 7.99% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.


4 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.

  1. 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.
  2. 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.
  3. 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.
  4. 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%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of April 29, 2021. Information and rates are subject to change without notice.
 


5 Important Disclosures for Navient.

Navient Disclosures

You can choose between fixed and variable rates. Fixed interest rates are 2.99% – 8.24% APR (2.74% – 7.99% APR with Auto Pay discount). Starting variable interest rates are 1.99% APR to 8.24% APR (1.74% – 7.99% 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.


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. 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 5/17/2022 student loan refinancing rates range from 2.05% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.93% Fixed APR with AutoPay.


7 Important Disclosures for PenFed.

PenFed Disclosures

Fixed Rate Loan Terms: 5 years/60 monthly payments, 8 years/96 monthly payments, 12 years/144 monthly payments or 15 years/180 monthly payments. Annual Percentage Rate is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed rates range from 3.29% to 5.43% APR. Rates are subject to change without notice. Fixed APR: Fixed rates will not change during the term. This rate is expressed as an APR. Since there are no fees associated with this loan offer, the APR is the same percentage as the actual interest rate of the loan. 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.


8 Important Disclosures for CitizensBank.

CitizensBank Disclosures

Education Refinance Loan Rate Disclosure:  Variable interest rates range from 1.99%-8.38% (1.99%-8.38% APR). Fixed  interest rates range from 2.99%-8.63% (2.99%-8.63% APR).

IS Variable Rate Disclosure:  Variable Rates advertised are based on the one-month London Interbank  Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business  day, of the preceding calendar month. As of December 1, 2021, the one-month LIBOR rate is 0.09%.  Variable interest rates will fluctuate over the term of the loan with changes in the LIBOR rate, and will  vary based on applicable terms, level of degree and presence of a co-signer. Your final variable rate may  be based upon the 30-day average SOFR index, as published by the Federal Reserve Bank of New York.  The maximum variable rate is the greater of 21.00% or Prime Rate plus 9.00%.

ERL Variable Rate Disclosure: Variable interest rates are based on the 30-day average Secured Overnight Financing Rate (“SOFR”) index, as published by the Federal Reserve Bank of New York. As of May 1, 2022, the 30-day average SOFR index is 0.29%. Variable interest rates will fluctuate over the term of the loan with changes in the SOFR index, and will vary based on applicable terms, level of degree and presence of a co-signer. The maximum variable interest rate is the greater of 21.00% or the prime rate plus 9.00%.

Fixed Rate Disclosure: Fixed rate ranges are based on applicable terms, level of degree, and presence of a co-signer.

Lowest Rate Disclosure: Lowest rates are only available for the most creditworthy applicants, require a 5-year repayment term, immediate repayment, a graduate or medical degree (where applicable), and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Rates are subject to additional terms and conditions, and are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.

Federal Loan vs. Private Loan Benefits:  Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer. Borrowers should carefully review federal benefits, especially if they work in public service, are in the military, are considering possible loan forgiveness options, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision on our website including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
 
Citizens Student Loan Eligibility: : Applicants must be enrolled at least half-time in a degree-granting program at an eligible institution.
 
Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DC, DE, FL, MA, MD, MI, NH, NJ, NY, OH, PA, RI, VA, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
 
Automatic Payment Discount Disclosure:Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount. Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on  their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan  servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to  successfully withdraw the automatic deductions from the designated account three or more times within any 12-month  period, the borrower will no longer be eligible for this discount.