How to Choose the Right College Savings Plan for You (It May Not Be a 529)

When your baby is, you know, a baby, you feel like you spend a fortune on diapers. But once that baby grows up, you can spend an actual, literal fortune on college, if that's the path your kid chooses to take. It's not a cheap path, but there are bank and government-backed plans that make that $400,000 bill a bit easier to stomach.


But what are your options? And how does it all work? And what happens if you save a ton of money and your kid chooses not to go to college at all? We dunno. But Marina Buatti, the vice president of women investors at Fidelity Investments, knows, and she's sharing her intel with us.

1. What are our options for college savings?

"While 529 college savings plans are the most commonly known option for saving for college, there are a number of investment accounts you can use to help pay for future college expenses," Buatti says. "Each option offers different features and benefits, and can be opened by a parent, relative, or other interested party on behalf of the child."

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So what do those options look like? Buatti says the three biggest ones are a 529 College Savings Plan, a Uniform Gift to Minors/Uniform Transfer to Minors Accounts (UGMA/UTMA), and a Coverdell Education Savings Account (formerly known as the Education IRA).

Still confused? Let's dig more into how each plan works. 

  • 529 College Savings Plans are tax-advantaged accounts specifically designed for college and related (and qualified) expenses. "They are sponsored by your state or a state agency and generally managed by an investment firm," Buatti explains. "Contributions to the account can be invested in a range of portfolios, and earnings grow federal income tax deferred and can be eligible for state tax deductions."

    Anyone can open a 529 and the beneficiary can be a future student of any age. Anyone can also gift into an existing account, which is great if you have generous parents looking to help their grandkids.

    More from CafeMom: 529 College Savings Plans: What They Are & Why Your Kid Needs One 

    Withdrawals are tax-free when they're used for tuition, books, computers, or other qualified expenses at most accredited two- and four-year colleges, US vocational schools, and eligible foreign institutions.  
  • Uniform Gifts to Minors/Uniform Transfers to Minors Accounts (UGMA/UTMA) are custodial accounts invested in a child's name that can be used for any expense for the benefits of that child, including paying for college costs. Whew. What that means is that you contribute to these accounts the same way you would to a 529, but funds can be withdrawn at any time and for things that are not college related, as long as the funds are an "irrevocable gift" to your child -- meaning they have to be used for the benefit of the minor, Buatti says.

  • Coverdell Education Savings Accounts (formerly known as the Education IRA) offer tax-deferred growth and are specifically designated for a child's expenses. They're almost identical to a 529 except they have a much lower contribution limit and are only available to families below a specified income level, Buatti explains.

"Of course, families can also save for college in a traditional bank savings account," she adds, "but there may not be as much potential for growth since that savings is not actively invested. And since the account is not dedicated to college, it may become more vulnerable to be tapped for other expenses."

2. What factors might make us choose between one plan and another?

"Choosing the right kind of savings account really depends on your family's individual goals," Buatti says. But there are some factors to keep in mind:

  • Purpose: Whether you want the savings to be used for any of your kid's needs, or whether you want to set them aside specifically for college

  • Control: Whether you want to control how the money is used or allow your child to when he or she comes of age

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  • Flexibility: Whether you want the ability to change the beneficiary on an account, which could be helpful for families with multiple kids

  • Investment options: Whether you want to choose your own investments, or if you want more formal investment guidance

  • Time frame: Whether you have the time to make aggressive investments and recoup if you suffer losses, or whether a conservative investment will grow enough in the time you have

3. When should you start saving and how much should you put in?

When should you start saving? Basically ASAP. "The sooner you start to save, the sooner your savings can be invested and take advantage of the power of compounding, which can help your college nest egg grow significantly over time," Buatti says. "Even if you only save a little bit each month, that savings will grow over time."

How much you contribute monthly depends on a bunch of factors, like whether you expect your child to go to a public or private school, how long you have to save, and how much is already in the account. It's confusing, but there are some customizable online tools to help straighten it all out.

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4. What happens to your money if you start a college fund and your kid decides not to attend?

"One of the benefits of saving in a 529 college savings plan is that you can change the beneficiary as needed," Buatti says. "If you have more than one child, and one earns a scholarship or doesn't need all of the money saved, you can use those funds to pay for college expenses for another child. You can even make yourself the beneficiary, if you are considering furthering your own education -- perhaps for a second career like cooking school or [something] similar."


Image via pathdoc/Shutterstock

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