How to Plan for Your Child's College Education

December 21, 2023 By

Helen Zhou

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If you’re starting to save for your child’s education, you already know: it’s expensive.

Research shows that the average cost for a student to attend a public, four-year, in-state institution has now topped $26,000 per year.

Studies show that nearly 64% of parents are saving or planning to save for college, yet parents typically are only able to cover around 10% of their child's college costs.

With the cost of college education rising, it's more important than ever to have a sound savings strategy in place now. Here are a few tips to help you save for your child's college education.

Set a target, and start saving early

When you start saving early, you take advantage of compounding interest. As you earn interest, you continue earning interest on the interest you've already earned. Over time, this can have a tremendous impact on your ability to build wealth, especially with education savings plans.

If you start a college fund with $1,000 and make monthly contributions of $200 with an annual return of 10%, you will accumulate approximately $106,000 after 17 years. If you start the process late and only save for 10 years (and all other factors remain exactly the same), you’ll have to save more than $500 each month to achieve a similar result.

Consider your college savings options

You have several savings routes to build college funds, including 529 plans, Coverdell Accounts, and custodial accounts.

529 plans

529 plans enjoy federal tax deferrals on their growth, and withdrawals are also tax free when used toward qualifying educational spending. They may also come with additional state tax benefits. While there are no limits in terms of contributions, you will pay gift taxes if you contribute more than $17,000 per year. There are also no age limits or time limits to 529 plans, and you can contribute indefinitely.

529 plans come in two primary forms:

Prepaid tuition plans

Some states offer prepaid 529 tuition plans that allow parents to prepay for their child’s college education at specific state colleges. The cost of the plan depends on when you start and the grade level of the child. These plans can be pre-funded with a lump-sum, five-year payment plans, or monthly installments.

529 savings plans

A 529 savings plan is like a 401(k) in that you can invest contributions in mutual funds, exchange-traded funds (ETFs), and bonds.

You can opt for an advisor-sold 529 savings plan from an investment firm, which often carries additional costs, such as management fees. The other option is a direct-sold 529 savings plan, which is sold by a state financial institution. There are no management fees, but you would need to manage your own portfolio.

Education Savings Accounts (ESAs) or Coverdell Accounts

Coverdell ESAs are savings accounts you can open at banks, credit unions, and brokerages. Their growth is tax-deferred, and this education savings vehicle offers the most financial flexibility.

ESAs, however, have strict limitations. For example, you can contribute only up to $2,000 per year, and contributions to an ESA after the beneficiary turns 18 are subject to an excise tax. In most cases, funds in a Coverdell account must be used within 30 days of the beneficiary turning 30.

Custodial accounts

Custodial accounts offer far more flexibility in how you can use the funds. For example, the beneficiary may decide to buy a property or start a business instead of using the funds for college. With a custodial account, you cannot change the beneficiary, and the funds will be released to them at their nominated age, typically between 18 and 25.

Contributions to custodial accounts are excluded from gift taxes for up to $17,000 per year. However, custodial account rules stipulate that the gift is irrevocable. Although withdrawals are allowed at any time, withdrawals must be in the child’s best interest.

Non-savings college funding

Life happens, and sometimes it’s not always possible to save. The good news is that there are other options available to pay for college tuition that don’t involve savings.

Scholarships

There are several scholarships and scholarship categories available. These include:

Private scholarships

These are offered by businesses and organizations to students who meet their internal criteria.

School scholarships

Universities and colleges offer scholarships to existing and future students.

Merit-based scholarships

Students who perform exceptionally well in a certain discipline may qualify for this type of scholarship.

Need-based scholarships

These scholarships are designed to provide a more inclusive college experience.

Student loans and other financial aid

Private student loans or a variety of federal student loan choices are other options.

Students can also explore such financial aid options as work-study and grants. Financial aid can cover education expenses such as tuition, fees, books, transportation, food, housing, supplies and more.

Make the right move when planning for a child’s education

When it comes to education savings, you want to be sure you’re making the right decision regarding to taxation, flexibility, growth, and accessibility. If you’re still unsure whether custodial accounts, 529 plans, or ESAs are the best option for you, we can help you determine which college savings product is right for your situation.

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Securities and insurance products are offered through and advisors are registered with Cetera Investment Services LLC (doing insurance business in CA as CFG STC Insurance Agency LLC), member FINRA/SIPC.

Advisory services offered through Cetera Investment Advisers LLC. Both firms are under separate ownership from East West Bank and its affiliates. East West Bank will not provide or be responsible for any tax or advisory services and/or legal information services given at the seminar.

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