Easy steps to start a college fund for your kids

With the cost of a college education continuing to rise every year, saving enough money to send kids to school can feel like a real financial challenge. On average, paying for tuition, books, and living expenses will cost over $56,000 per year. The U.S. Department of Education provides a net price calculator to help estimate college costs across the country to help families determine their potential savings needs. When exploring options for funding higher education, there are numerous strategies available. Let’s take a closer look at some of the college savings options for children and how they can be used to help finance a student’s academic future.

Exploring education funds for children or grandchildren with 529 college savings plans

When exploring college savings options for children, many people may be familiar with 529 plans. These tax-advantaged accounts can help individuals set aside funds for qualified education expenses. Like 401(k)s and IRAs, 529 plans allow contributions to be invested in mutual funds or other investment options. However, while earnings in retirement accounts grow tax-deferred, 529 plan earnings grow tax-free and can be withdrawn without taxes when used for qualified education expenses. Funds can be used to support education costs for a child, eligible family member, or even the account holder, so long as eligibility rules are met. Nearly every state offers its own version of a 529 plan. Some private colleges and universities have pre-paid tuition plans as well. Tools like the 529 plan comparison tool on Savingforcollege.com can help identify options that align with a specific savings plan for children’s education savings goals. There are two main types of 529 plans to consider:

529 college savings plan

With this most common type of 529 plan, an investment grows on a tax-deferred basis, and funds can be withdrawn tax-free to pay for an eligible family member’s expenses like tuition, textbooks, and room and board.

529 prepaid plan

A 529 prepaid plan allows for the advance payment of some or all of the tuition and mandatory fees at an eligible public or private college or university. This option enables participants to “lock in” current tuition rates and make contributions either as a lump sum or through installments. Unlike traditional 529 savings plans, prepaid plans generally cover only tuition and mandatory fees, and do not typically include expenses like books, room, or board.

How to start a 529 plan to save for your child’s future

Parents and grandparents interested in establishing a 529 savings account can do so through most major banks, credit unions, or investment companies. Some states offer direct-sold plans. These accounts are a popular choice for saving education funds for grandchildren or building a savings plan for children’s education. While requirements vary by state and provider, most 529 plans do not require a high minimum initial deposit—some may not require any minimum at all—making it accessible to start saving early. Typically, you can contribute as much and as often as you wish within the annual and lifetime contribution limits. This flexibility makes a 529 an excellent example of how to start a college fund. It's important to review plan-specific guidelines, such as eligible expenses, potential tax advantages, and any residency or beneficiary requirements. Comparing plans can help families find the most flexible and beneficial option to grow their education savings for the future.

Alternatives to 529 plans: More savings plans for children’s education

While 529 plans are a well-known option, there are several other college savings strategies that can help families prepare financially for higher education. Since each comes with unique benefits, limitations, and tax implications, families should review all options and choose the best approach that best aligns with their goals, budget, and timeline. Exploring a combination of savings options can be a practical way to support a child’s academic future and set them up for success when it’s time to choose a college.

Grants and scholarships

A common type of financial aid or gift aid where students can be awarded money to help with the cost of higher education is through grants and scholarships. Grants are often awarded based on a family’s financial situation and scholarships are typically based on merit, whether academic, athletic, or activity based. To apply, you will likely need to fill out financial aid forms, such as the Free Application for Federal Student Aid (FAFSA), or follow the specific application process for the individual scholarship. Free online resources like the College Board’s Scholarship Search can help a family find matches based on a child’s interests and affiliations. Sources of grants and scholarships include:

Government

The federal government offers need-based financial aid in the form of grants and state governments often have scholarships and grants for residents planning to attend school in their state.

Private organizations

College funds may be found through foundations, clubs, community organizations, and churches.

Colleges and universities

The institution a child chooses to attend often offers scholarships and grants for their students.

Coverdell education savings account

A Coverdell education savings account (ESA) is a trust or custodial account where the beneficiary can use funds to pay for qualified education expenses. These accounts can be opened for any child under the age of 18, and assets must be withdrawn by the time they turn 30 years old. Like a Roth IRA, you can make a non-deductible contribution each year, and similar to a 529 plan, Coverdell ESAs offer tax-free investment growth and tax-free withdrawals when money is used to pay for qualified college expenses. Keep in mind that contribution limits may apply.

U.S. savings bonds

U.S. Savings Bonds, specifically Series EE and Series I bonds issued by the U.S. Treasury Department, have long been viewed as a low-risk way to help save for education expenses. The principal is protected, and while many hold bonds until college age, early redemption is possible but results in less interest earned.

Because these rules regarding potential tax exclusions are complex and depend on individual circumstances, anyone considering using U.S. Savings Bonds for education expenses should work with a qualified tax or financial professional to fully understand the potential benefits and limitations.

Roth IRA

Saving for retirement may come to mind when you think of a Roth IRA, but it can also be used to help pay for qualified college expenses. Contributions to a Roth IRA are made with after-tax dollars, where annual amounts are limited each year. Generally, if earnings are withdrawn before reaching age 59 ½, a 10% early withdrawal penalty may apply but if these withdrawals are used for qualified education expenses, you can potentially avoid paying this fee and will only have to pay income tax. Roth IRAs can be used to help multiple students.

Cash value life insurance for college funding

When discussing life insurance, most people think of the death benefit, but certain policies may offer valuable living benefits as well—like helping pay for higher education. A permanent life insurance policy that can accumulate cash value, like indexed universal life insurance, can offer tax-deferred growth¹ and policy loan options.²

Cash value may be accessible through policy loans, which are generally income tax-free. In addition, benefits typically do not impact financial aid eligibility, and the money can be used for anything, including expenses beyond tuition and books, like transportation or travel costs, sports or club activity fees, a computer, or sorority and fraternity fees. Learn more about the role of life insurance in college planning and how a policy can help with tuition costs.

Help with financial planning for families saving for their child’s future

Whether college planning is already in progress or just beginning, you might want to consider seeking some external help. Certain financial professionals can assist in reviewing long-term education goals, evaluating available savings options, and identifying strategies that align with overall financial plans. Curious to learn more about options such as how life insurance can play a role in planning for college? Visit Midland National find an agent page to connect with a financial professional near you.

Neither Midland National Life Insurance nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into any of the options mentioned in this article.

1. The tax-deferred feature of the universal life policy is not necessarily for a tax-qualified plan. In such instances, you should consider whether other features, such as the death benefit and optional riders make the policy appropriate for your needs. Before purchasing this policy you should obtain competent tax advice both as to the tax treatment of the policy and the suitability of the product.

2. Policy loans from life insurance policies generally are not subject to income tax, provided the contract is not a Modified Endowment Contract (MEC), as defined by Section 7702A of the Internal Revenue Code. A policy loan or withdrawal from a life insurance policy that is a MEC is taxable upon receipt to the extent the cash value of the contract exceeds the premium paid. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax before age 59½, with certain exceptions. Policy loans and withdrawals will reduce the cash value and death benefit. Policy loans are subject to interest charges. Consult with and rely on your tax advisor or attorney for your specific situation.

The primary purpose of life insurance is to provide a death benefit to beneficiaries. Because of the uncertainty surrounding all funding options except savings, it is critical to make personal savings the cornerstone of your college funding program. However, even a well-conceived savings plan can be vulnerable. Should you die prematurely, your savings plan could come to an abrupt end. To protect against this unexpected event, life insurance may be the only vehicle that can help assure the completion of a funding plan. In addition to the financial protection aspect of insurance, the tax-deferred buildup of cash values can be part of your college savings plan. Generally, if the policy is not a Modified Endowment Contract then tax-free withdrawals can be made up to the contract's cost basis. Moreover, if the policy is not a Modified Endowment Contract, then loans over the cost basis are also tax-free as long as the policy remains in force.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.

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