Some of these college savings methods you will already know about. And some of them you may not be as familiar with - even if we ask this same question of ChatGPT :) So if your soon-to-be college student - and we take liberty with the term "soon" meaning anywhere from age 0 to 18 - If this student may not get a scholarship at their school of choice, then we are probably smart either way to go ahead and start planning for this potential future expense.  

So, if you are planning for college, it is highly likely you have heard of the 529 plan.  We'll talk about this one and a few others. We will not say which ones are better or worse to use, but we will point out the pros and cons of each to help you make your own assessment. 

But before we get into the savings methods, it is worthwhile to back up a bit and examine your own philosophy on college to begin with. Not every student is going to end up going to college or want to be. Some will go beyond undergraduate and on to advanced degrees. The older the student is, the more likely you will have a better read on how your student is wired and whether they will be headed to a college, technical school, vocational school, the military, or straight into employment - self or otherwise. Secondly, philosophically and practically do you as a parent believe you want to pay for your student's college tuition et al (room and board, books, meals and etc.) in whole, in part, or none at all? There is no right or wrong answer here, and sometimes it largely depends on the parent's financial position and retirement projection. Come talk to me about this if this is you. Lastly, if they are going to college, are they going the dual-enrollment route? Community college then finish out somewhere else? Or all four years in one place? It is worthwhile to first understand your, and perhaps your student's, philosophy, goals and objectives before going into selecting college savings methods. 

Be that as it may, Let's assume the student is going "somewhere" that requires tuition and fees. Let's take a look at some ways to go about this: 

• 529 Plans and Prepaid tuition plans. Money in a 529 grows tax-deferred, much like an IRA. Withdrawals are exempt from federal and state taxes if used for qualified educational expenses (for 529s, this is tuition and fees, books, student loan payments, room and board, equipment). Some states, Alabama included, provide a tax deduction or credit for 529 contributions. 529's are flexible in that you can pass on the account to siblings and relatives, plus use it for primary/secondary, apprenticeship or college education. The disadvantage of a 529 is its per-state-based limited investment options and that some state plans' investment options perform better than others. If no students ever uses the plan, there are several avenues to get the money out, but any straight withdrawal has a 10% penalty. 529s are a tax-advantaged opportunity, but also present some complexity in figuring out the entire college financing picture. Prepaid plans are what they say they are - you prepay the tuition at today's prices to lock in lower costs early. However, they only cover tuition, may not be guaranteed, and can't be used for K-12. 

• Coverdell ESAs. Funds in an ESA can be used tax-free for qualified education expenses. It can also be used not only for college, and also primary and secondary schools. The advantage of an ESA is its utility beyond tuition expense to use for other school expenses. The disadvantage is the $2000 annual contribution limit and disbursement by the student before age 30. It could act as a useful side fund for "other" college expenses, and also may likely have utility in tax-efficiency for primary/secondary private school expenses, though since 529s also now do this, less so. 

• UGMA/UTMA. These are custodial accounts, technically owned by the minor. The custodian manages the account on behalf of the minor until they become of age, wherein they then own the account and can do with it whatever they please. Placing funds in one of these accounts is basically a gift, such that it could be subject to gift tax (unlikely, unless you are super-wealthy) but we look to keep it under the gift exclusion limit ($17,000 for 2023). The advantage of a UGMA is its simplicity and flexibility for any expense, college or otherwise. There are no withdrawal limits or restrictions. The disadvantage is its irrevocability. Anything placed in there is now property of the minor. It also can be adverse to a financial aid application, and also provides no tax benefit to the donor such as with a 529 plan. 

• Taxable accounts. This is a side savings account, CDs, brokerage investment account, etc. that you might start to save after-tax to use later for college and other future expenses (travel, cars, medical bills, and so on). So, yes this is a variation of pay as you go. It is less tax efficient than some other methods, but investing wisely can help to overcome the inertia of annual 1099's. 

• Retirement accounts (Yeah, we're talking about your retirement plan, parents). IRAs and 401(k)s). While not perhaps ideal, it is an option. If you are still with the same employer and hold their 401(k) plan, most plans provide a loan option up to $50,000. IRAs (Traditional and Roth) do not have loan provisions, but you can withdraw from them. If you withdraw from a traditional IRA, or 401(k) plan from a previous employer, and you use the proceeds for qualified educational expenses*, there is no 10% penalty. You still have to pay the ordinary income taxes on the withdrawal though. If you withdraw from a Roth IRA, and you keep this withdrawal under the basis (what you contributed), then there is no adverse tax impact. *Qualified educational expenses for IRAs are tuition and fees, room and board, books and supplies. The school the student is attending must also meet certain requirements (accredited, eligible for US Dept or Education student aid programs, etc.) 

• Savings bonds (EE, I). US savings bonds earn a stated or varying interest rate and accrue over time. They are exempt from state and local taxes, though subject to federal taxes. You can exclude the federal interest on EE and I bonds issued after 1989 when used for educational expenses*, if your MAGI is less than $106,850 filing single/HoH/surviving spouse, or $167,800 (2023) filing jointly. *Educational expenses are limited to tuition and fees, and/or contributions to a Coverdell ESA or qualified tuition program (QTP). 

• Trading your time for dollars (Employers, Military service). Many employers provide educational benefits for their employees to pursue mainly advanced degrees at reduced or no cost (Masters degree or PhD). If an undergraduate student is able to secure an internship (highly recommended, by the way, for a number of reasons), that employer pays the student for work performed, which can be used to offset undergraduate educational expenses. As for military service, the GI Bill and extensions to it makes it an option to pay for college once your service is completed. You may also learn a set of skills as an "apprenticeship". It could also be thought of as an internship, if the learned skills align with your ultimate career objectives. 

Keep in mind that any of these methods may or may not have an impact on any financial aid the student may be seeking to obtain, so some careful planning may be required if the college financing picture is more complex. There are also more details on limitations, restrictions and cross-over issues between savings methods I left out here. If you need help, talk with your Advisor to help sort through the options and formulate a strategy together with you.