College Savings Plans: 6 Options to Consider

Tom Gilmour is a senior director of Planning Experience Integration for Northwestern Mutual.

When your kids are still in diapers, going through the finer points of different savings plans for college probably isn’t high on your list. After all, the cost of raising kids is staggering all on its own. But your kids will be grown up before you know it so it’s never too early to start saving for college—even if you aren’t sure your young one will eventually attend.

According to the 2024 Northwestern Mutual Planning & Progress study, 95 percent of parents who are saving for their kids' college expect to cover at least half the cost.​ And of this group, about 36 percent are expecting to cover the entire cost.​

People also expect college to cost them about $77,300 on average. Though this number can vary greatly depending on personal situations, college costs still continue to skyrocket, so starting early is the best way for your savings to grow. Fortunately, there are numerous choices for savings plans that are appropriate for college—even some that have tax advantages. Here are six options to consider.

6 of the best college savings plans

While some of the specific plans have contribution limits, it’s important to point out that the yearly gift tax exemption rules apply to gifts to any of these plans. That means if you’re contributing more than $18,000 as an individual ($36,000 if you’re married), you will either eat into your lifetime gift-tax exemption (currently $13.61 million if single and double that if married in 2024) or you will owe tax on any contribution that’s over the yearly exemption.

1. 529 plans

A 529 plan is a dedicated college savings plan that allows your money to grow in a tax-advantaged way. You won’t have to pay federal income taxes when you withdraw the money from a 529 as long as you are using it for qualified expenses, which include tuition, fees, class materials and more at any accredited college. (If you use the money for a non-qualified expense, you will owe taxes as well as a 10-percent tax penalty on the growth.) You can also use up to $10,000 per year to pay for tuition for grades K through 12.

529 plans will soon become a bit more flexible, thanks to the Securing a Strong Retirement Act of 2022 or SECURE 2.0 Act, which offers another tax-advantaged alternative to some savers. Starting in 2024, a lifetime limit of $35,000 can be rolled over into a Roth IRA plan designated for the named beneficiary. This is one more reason why it might be better to start your 529 fund earlier rather than later: It only applies to plans that have existed for at least 15 years before the rollover, and only 529 contributions made at least five years before the rollover are eligible.

Almost anyone can open and/or make contributions to a 529, which makes it a great way for you, or even other family members save for your baby’s future. Every state has its own plan, but you’re not limited to the one in your own state. However, some plans may allow you to reap additional tax advantages as a resident.  

529 plans also offer an additional tax advantage by allowing “super funding.” This means you can contribute as much as $90,000 as an individual ($180,000 if you're married) at one time and treat the contribution as if it were made over the next five-year period without eating into your lifetime gift-tax exemption.

2. Coverdell Education Savings Accounts (ESAs)

Formerly known as an “Education IRA,” Coverdell accounts offer tax-deferred savings and tax-free withdrawals when the funds are used for educational costs. If they’re not used for education, the money will go back to your child rather than the plan holder, giving you less control over how it’s used.

You can only contribute up to $2,000 per beneficiary per year, and even that is subject to income limits. For 2024, contributions are gradually reduced once your modified adjusted gross income (MAGI) hits $190,000 for married couples filing jointly or $95,000 for single filers; they phase out completely for those with a MAGI of $220,000 or more ($110,000 for single filers).

3. UTMA/UGMA custodial accounts

Uniform Transfer to Minor (UTMA) and Uniform Gift to Minor (UGMA) “custodial accounts” can be used for many expenses beyond college, providing additional flexibility that can be attractive to parents who want to save for their child but don’t want to lock into a college savings plan.

One key difference from other college savings choices is that the UGMA/UTMA comes with no strings attached: The account automatically transfers to the child at the age of 18 or 21 (depending on the state), which means that he or she can then spend the funds on anything they choose. In addition, unlike 529s and Coverdell accounts owned by the parents, UGMAs and UTMAs will appear as assets of the child on the Free Application for Federal Student Aid (FAFSA), which affects their eligibility for aid more significantly than parent-owned assets.

4. Roth IRAs

Traditionally used as a retirement savings vehicle, a Roth IRA offers the benefit of savings that grow tax-free. Typically, you can withdraw direct contributions that you’ve made to the Roth IRA whenever you want, but you can’t withdraw earnings without paying a 10 percent penalty until age 59 ½, although there is an exception for qualified education costs if the plan has been open at least five years.

Another option is to open a custodial Roth IRA for your child. The only requirement is that your child needs to be making an income, which makes this a good option to add to your savings plan later on. Since it’s not limited to college expenses, your child can keep the money they don't use for their retirement. (Just keep in mind that annual contributions are currently capped at $ 7,000 if you’re under 50.)

5. Permanent life insurance

If life insurance wasn’t already a key component of your financial plan, becoming a parent likely made you more aware of its importance. Not only will a whole life insurance policy provide a death benefit to your loved ones if you die too soon, but a policy purchased for your child when he or she is a baby will accumulate cash value that you could eventually use to help pay for college costs. Another benefit is that child life insurance isn’t counted as an asset when it comes to filing for financial aid.¹

6. Educational trusts

An educational trust is a type of trust that allows you to set funds aside and offer guidance on how the funds will be used, such as for a four-year college education or for any educational expenses, including trade school, community college or even travel. The money in the trust will be tax-free on withdrawal but you will pay taxes on the money earned by the investments; upon withdrawal it will be taxed at the beneficiary’s tax rate, which might be lower than yours. Additionally, any trusts set up to benefit the student will be reported on the FAFSA as a student-owned asset, which affects eligibility more significantly than parent-owned assets.

What is the best savings plan for college?

With so many options, it's important to find the college savings account that meets your and your child's needs. Your financial advisor can help you create a college savings plan that fits in with all of your financial goals by asking you questions such as: Would you rather cover the entire cost of college for your children and have slightly less to spend in retirement? Or are you OK with your kids having to take some loans for college so that you have more to spend in retirement? Working with your financial advisor can help you prioritize what's most important for you and your family.

¹Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event.

All investments carry some level of risk including the potential loss of principal invested. No investment strategy can guarantee a profit or protect against loss.