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Getting started with college savings

How you can start preparing now for your child’s college tuition

You understand the power of making smart investments. It can give you freedom and flexibility to do what you want. For many, a college education is one of the smartest investments you can make, generating important intangible benefits — new ideas, broader experiences, cultural awareness, and self-confidence. Plus, higher learning often leads to higher earning power.

Although you know the value of a good education, helping your child pay for their college education can be a real challenge.

Currently, tuition costs are increasing at a faster rate than inflation. For example, a recent study reports that after inflation, a university education has risen 2.9 percent on average per state.1

How much does college cost?

On average, tuition for public universities ranges from $10,116 (in-state) to $22,577 (out-of-state) per year. Private schools average $36,801 per year. And these costs don’t include housing, books, and food2 — and you know how much college kids can eat.

Clearly, making sound college funding strategies is important if you don’t want to dip too deep into your family’s savings. Here’s some helpful info to get you started.

College funding options

Rising college costs have forced parents and students to become more creative in their search for funding. Consider these options to help pay for your child’s education.

Grants and scholarships

Financial grants can be helpful — but don’t count on them being a predictable source of funds. Oftentimes, grants are based on financial-need tests that exclude many middle-income families. Also, it’s difficult to know whether or not your child will be eligible for future scholarships.


Banks, civic organizations, colleges, and federal and state governments sponsor loan programs. There are, however, two main drawbacks to borrowing for college.

The amount of the loan is limited by the family’s — or the student’s — ability to repay, as the loan plus interest becomes a long-term financial burden.

Currently, 70 percent of college seniors will graduate with student loans. On average, these loans add up to $30,000 per student.3

Family resources

This category includes personal savings by students, parents, or other family members. And there are also tax advantageous financial vehicles (such as the 529 Savings Plan) your family can use for college expenses.

Getting started with college savings

If you have college-bound children, start a funding strategy as soon as possible.

No matter how little or how much you put aside, the sooner you develop a systematic strategy, the more time you’ll have to accumulate the funds you need — and the faster your compound interest will grow.

When you set up your funding strategy, make sure that it is:

  • Realistic. You’ll need to know a rough estimate of how much college will cost. If you hope to send your now 2-year-old daughter to an in-state college in 16 years, for example, how much should you expect to pay? Go to for an estimate. Remember knowledge is power.
  • Flexible. A good strategy offers a choice of funding vehicles to accommodate your risk tolerance, time frame, and financial goals. Some are tax-deferred or offer other tax-related benefits.
  • Inflation-adjusted. Your college funding goal may be a moving target. Your strategy will need to be adjusted accordingly as college costs change (most likely increase) over time.

College funding considerations

A solid funding strategy will help keep you in check. There are plenty of other factors to think about when searching for the right financial vehicle, such as:

  • Control. Who should have control of the account now and in the future? You? Aunt Susan, if something happens to you? Your child?
  • Flexibility. Are you unsure what the future holds, or do you already know that your child is going to attend a specific school?
  • Financial aid. If you qualify, will there be an impact on financial aid eligibility?
  • Investment options. Are they broad or limited? And what types of investments do you prefer?
  • Estate planning. Some vehicles may not reduce your taxable estate. Others may offer significant estate planning benefits.
  • Taxation. Are the contributions tax-deductible? Tax-deferred? How will the distributions be taxed?

Additional considerations

Let’s consider the above factors when talking about the following:

  • The UTMA (Uniform Transfer to Minors Act) and the UGMA (Uniform Gift to Minors Acts)  govern the funds under the control of a custodian (until a child reaches a certain age) that can be used for any expense that benefits the child, are subject to a kiddie tax, and are considered to be an asset of the child (which could impact financial aid) or an asset of the custodian (which could impact your estate planning).
  • A Coverdell ESA (Education Savings Account) is a trust or custodial account that can be used for primary, secondary, or higher education expenses and set up for a designated beneficiary who is under the age of 18 or has special needs. Distributions from an ESA is tax-free as long as the funds are used for qualified expenses and do not exceed the beneficiary's qualified education expense.4
  • 529 College Savings Plans were introduced in 1996 as a way to help parents put away money for their child’s college expenses. The money grows tax-deferred and can be withdrawn tax-free if used to pay for qualified education expenses. Since then 529 plans have been expanded to allow up to $10,000 per year to pay for tuition expenses at an elementary or secondary (k-12) public, private or religious school of the beneficiary's choosing. The SECURE Act now allows families to use funds to help pay down qualified student loans.There is an aggregate lifetime limit of $10,000 in qualified student loan repayments per 529 plan beneficiary. Student loan interest paid will become ineligible for student loan interest deduction. 
  • A Roth IRA usually is synonymous with retirement. However, you can generally withdraw money from a ROTH IRA to pay for qualified higher education expenses with no early distribution penalty applies. Keep in mind that earnings withdrawn prior to reaching age 59 1/2 and/or not meeting the five-year holding period may be subject to a 10 percent penalty in addition to income tax.
  • Permanent life insurance provides the potential for death benefit protection for your entire life, while while offering the  ability to build and use cash value on a tax-advantaged basis for expenses such as college funding.

Do your homework

Now that you know more how you can pay for your child’s education, there’s still more to learn so you don’t leave money sitting on the table.

Detailed information about private and public college tuition, financial aid options, available scholarships, and college planning calculators are available at your fingertips. To get started, here are some helpful online resources:

It’s never too soon to begin setting money aside for your child’s education. By starting early enough, you can reach your goal.

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1. Lindsay, Tom. "New Study: Despite Nonstop Talk of ‘Making College More Affordable,’ Tuition Continues to Outpace Inflation." January 29, 2020.

2. Johnson, Joel. "College Saving Tips — What You Need To Know." January 28, 2020.

3. Dickler, Jessica. "How to start paying back your student loans." November 12, 2019.

4. "Topic No. 310 Coverdell Education Savings Accounts."

5. Kerr, Emma. "Paying Student Loans With 529 Plan Funds." January 29, 2020.

Please keep in mind that the primary reason to purchase a life insurance product is the death benefit.

Life insurance products contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions, such as surrender periods. 

Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender, and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. You should consult your tax advisor when considering taking a policy loan or withdrawal.

Guarantees are based on the claims-paying ability of the issuing insurance company. Please keep in mind that the primary reason to purchase a life insurance product is the death benefit.

Investments will fluctuate and when redeemed may be worth more or less than when originally invested.

A 529 plan is a tax-advantaged investment program designed to help pay for qualified education expenses. Participation in a 529 plan does not guarantee that the contributions and investment returns will be adequate to cover education expenses. Contributors to the plan assume all investment risk, including the potential for loss of principal, and any penalties for non-educational withdrawals. Your state of residence may offer state tax advantages to residents who participate in the in-state plan, subject to meeting certain conditions or requirements. You may miss out on certain state tax advantages should you choose another state's 529 plan. Any state based benefits should be one of many appropriately weighted factors to be considered in making an investment decision.  You should consult with your financial, tax or other advisor to learn more about how state based benefits (including any limitations) would apply to your specific circumstances.  You may also wish to contact your home state's 529 plan Program Administrator to learn more about the benefits that might be available to you by investing in the in-state plan.

This information is a general discussion of the relevant federal tax laws provided to promote ideas that may benefit a taxpayer. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. Taxpayers should seek the advice of their own advisors regarding any tax and legal issues specific to their situation.


DOFU 3-2020