top of page

3 Critical Considerations For How To Save For Your Child’s (or Grandchild’s) College Education—Part 1




If you have started to save for your child or grandchild’s college education, it’s worth considering whether to use a 529 plan, an education savings account, or an Irrevocable Trust.


Here’s what we think you should consider as you decide:


First, consider whether you want your offspring to have broader options than just the traditional college experience.

Since the start of the pandemic, college enrollments have declined by over one million students over the past two years, and with college tuition getting more and more expensive, many students are considering alternatives to the traditional higher education path.


Gap years, travel, trade programs, and online training are replacing the traditional college education path for many, and if you want that to be an option for your children or grandchildren, you should be aware that the traditional college savings plans may not be the right fit for your family.


Instead, consider whether it may make more sense to create an educational trust for your family, in which all of your children and grandchildren can benefit. More on that below in the section on education trusts.


Second, consider the financial aid consequences of how you are saving for college.

If you think your child or grandchild may need or want to qualify for financial aid, beyond student loans, the way you save for their education may significantly impact their ability to qualify. If your offspring will need financial assistance to pay for their education, it’s vital that the way in which you choose to save will not negatively impact their qualification for such assistance.


Third, consider the income tax consequences of how you are saving for college.

When you set aside money, unless you are saving for retirement in a qualified retirement plan, the income earned on that money is subject to income taxes. However, with various types of college savings plans, you can defer or avoid income taxes altogether.


529 Plans & Education Savings Accounts (ESAs)

Since 1996, 529 plans, which are named for Section 529 of the Internal Revenue Code, have been one of the most popular options for covering college costs. Congress expanded these plans to cover K–12 education in 2017, and it also changed the program to pay up to $10,000 in student loan debt in 2019.


One reason 529 plans are so popular is due to their tax-saving advantages. The money you contribute to a 529 account grows on a tax-deferred basis, and withdrawals are tax-free, provided they are used for qualified education expenses, such as tuition, room and board, and other education-related fees. And many states also provide a tax deduction or credit for 529 contributions.


Another appealing feature of 529 plans is their relatively high contribution limits. There is no limit on how much you can contribute each year, although if you contribute more than $16,000 (the amount of the gift tax exemption limit  in 2022), you can trigger federal gift taxes and the requirement to file a gift tax return. If you plan to make a contribution close to or above $16,000, contact us for guidance.


Finally, with many 529 plans, you can set up an automatic transfer to add money directly from your bank account to your 529 account. Plus, many 529 plans allow automatic contributions as low as $25 per month.


Before you automatically save for your offspring’s future education using a 529 plan, keep in mind that to avoid paying taxes, plus a 10% penalty, the money must be used for eligible expenses only. Eligible expenses include tuition and fees, room and board, books, as well as  computers and other items if they are required for classwork.


If your child decides not to go to college, you will pay income taxes, plus the 10% penalty in order to withdraw the funds and use them for something else. The other downside to saving for your child’s education in a 529 plan is that your investment options may be significantly limited to only a small selection of mutual funds.


Education Trusts

While 529 plans are quite popular, there is another way to save for your child or grandchild’s education through the use of an irrevocable trust. While there isn’t any income tax deferral on income earned by the assets held by these trusts, it is possible to structure a trust, so your beneficiaries could qualify for financial aid that they may otherwise be ineligible for with a 529 plan. If qualifying for financial aid would be even more valuable than savings on the income taxes owed on income earned by the trust, contact us to discuss setting up an educational trust for your family.


Next week, in part two, we’ll go into more detail about educational trusts. For now, take into consideration what matters most to you when it comes to saving for college: tax savings, financial aid considerations, or a variety of investment and education options. Then, contact us if you’d like to consider the educational trust option as part of your legal and financial decisions for the people you love.


This article is a service of a Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.


Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, contact us to schedule your Family Wealth Planning Session. Even if you already have a plan in place, we will review it and help you bring it up to date to avoid heartache for your family. Schedule online today.

0 views0 comments

Recent Posts

See All

Comentários


TLG Logo - White.jpeg
Phone Icon - TLG Yellow.png
IG Logo - Gold.png
Facebook Logo - Gold.png
TLG X Logo.png
TLG Linked In Footer Logo.png

FLORIDA

3505 Lake Lynda Dr., Suite 200

Orlando, FL 32817

INDIANA

333 North Alabama St., Suite 350

Indianapolis, IN 46204

STAY UP TO DATE

Subscribe to our newsletter and stay up to date with Tower Law Group.

Copyright © 2025 Tower Law Group All Rights Reserved | Privacy Policy  | Disclaimer  | Law Firm Accessibility Statement  |  Terms of Use

 

LEGAL DISCLAIMER: 

We appreciate your interest in Tower Law Group. Please know that our website is provided for informational purposes only. It should not be considered legal advice and visitors to our website should not take action upon this information without first discussing it with a legal professional.

 

Your visit to this website or transmission of information does not create an attorney-client relationship with Tower Law Group generally, or any of its attorneys. If you wish to contact anyone at Tower Law Group please do not disclose any information that you consider to be confidential in that communication. Before an attorney-client relationship can be established, an attorney from Tower Law Group will need to confirm that the firm does not already represent another entity involved in the matter and that the firm is willing to accept representation.

 

Tower Law Group will regard any information or materials you transmit as confidential only after this confirmation by the firm to you that it is willing to accept representation. Until such time, all unsolicited inquiries or information received by Tower Law Group will not be regarded as confidential, even if considered confidential by you, and will not preclude the firm from accepting representation of other entities that may be adverse to your interests.

Custom law firm websites from Practice42.
The hiring of a lawyer in an important decision that should not be based on advertising.
The information on this website is for educational and informational purposes only. It does not constitute legal advice.
The use of the website does not constitute an attorney-client relationship.

practice-white.png
bottom of page