Education Planning

529 plans are state tuition savings programs that enable you to save money on a tax-deferred basis to fund future college and graduate school expenses on behalf of a beneficiary, like a child or grandchild. They’re administered by mutual fund companies and give you the choice to select an age-based option which automatically adjusts the asset allocation mix as your child nears college age or a fixed portfolio that follows a set investment strategy based on your goals and risk tolerance. 

A Coverdell Education Savings Account (ESA) is a trust or custodial account and can be used for education expenses, such as tuition, books, room and board, computers, and internet access for kindergarten through high school, college, and graduate school. When the account is set up, the beneficiary must be either under the age of 18 or special needs and designated a Coverdell ESA. In general, the beneficiary can receive tax-free distributions to pay for qualified education expenses. If the distribution exceeds the amount of qualified expenses, that portion is taxable to the beneficiary. Any amounts remaining in the account must be distributed when the designated beneficiary reaches age 30 unless the beneficiary is a special needs beneficiary.

The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are custodial accounts that provide a way to help adults save and invest money on behalf of a minor. They are easy and inexpensive to set up. Money put into the account becomes the property of the minor, can only be used for their benefit, and does not need to be used solely for educational purposes. Because the accounts are considered asset owned by the child, they can impact financial aid awards. Additionally, when the child comes of age, generally between 18 and 25 depending on the state, the assets must be transferred to the beneficiary who can use the money for any purpose.

Life insurance isn’t the first thing that comes to mind when thinking about saving for college, but it’s worth considering. When you buy a whole life policy, a portion of your premiums go toward a death benefit and another portion is diverted to a separate cash-value account. When it’s time for your child to start college, you can take a loan out against this cash balance. This will reduce your death benefit until you pay back the money. Whereas a 529 savings plan is considered a parental asset, a portion of which is counted in the applicant’s Expected Family Contribution for each college year, life insurance isn’t included in financial aid calculations.