Core inflation has been in the news a lot lately, with the Consumer Price Index currently showing a year-over-year increase of 4.6%, more than two percentage points above the Fed’s target range. But an area where inflation has been even more problematic is in the cost of higher education: tuition costs have risen by three to four times more than the CPI since the 1980s. That makes it more important than ever for parents and grandparents who want to help the next generation to consider all their available options for providing financial assistance for higher education.
529s Are Still a Good Plan
Of course, many parents and grandparents are already familiar with and using 529 plans for providing college and other education funding. These tax-advantaged plans, administered by each state, allow tax-free compounding and non-taxable withdrawals to pay for qualified educational expenses, though investment choices may be limited. Plan assets can also be shifted among beneficiaries, so that if an older sibling graduates from college with a balance remaining in the account, a younger sibling or cousin can become the beneficiary of the plan, with access to the remaining funds.
Alternatives to 529 Plans
So, while there is certainly nothing wrong with using 529 plans for education funding, there are several other alternatives that deserve consideration. Each of these has certain aspects that could be advantages over the 529 alternative, while other provisions could be less desirable, depending on the specifics of the situation. Let’s take a look.
1. Uniform Gift to Minors / Uniform Transfer to Minors Account. Uniform Gift to Minors accounts (UGMA) and Uniform Transfer to Minors accounts (UTMA) are both relatively simple means of providing assets for various uses, including education funding, for minor children. Unlike a 529 account, which must be opened initially with cash or cash equivalents, various types of assets can be contributed to UGMAs and UTMAs, and the choice of investments is very broad. The account can be housed at a brokerage firm, by a financial advisor, by a mutual fund, or by some banks. The contribution immediately places the assets under the ownership of the minor in whose name the account is established. This, in fact, can be useful for those with significant estates or who have capital gains concerns who are using their annual gifting exclusion to transfer appreciated assets to children or grandchildren. And, since most minors do not earn sufficient income to require filing a return, the funds in a UGMA or UTMA can often grow without taxation. Once assets are in a UGMA or UTMA, they can only be used for the benefit of the minor, and this, obviously, can include paying education expenses. However, also unlike a 529 plan, UGMA/UTMA assets are not limited to educational uses; they may be used for a down payment on a home, to purchase a vehicle, or for any other use of legitimate benefit to the owner of the account. One caution: when the owner of the account reaches legal age (18–25, depending on the state), they are free to access the account. In other words, the parent or grandparent who sets up a UGMA or UTMA has less control over how the funds are ultimately used.
2. Prepaid tuition plan. Many states offer prepaid tuition plans, allowing parents, grandparents, and others to lock in the price of a future college education at current rates. Especially for those who are confident that their child will attend a participating school, prepaying tuition can offer significant savings. And, because these plans are not dependent on investments increasing in value, there is very little risk involved. However, if the child decides against attending a participating institution, the value of the plan could be greatly decreased.
3. Roth IRA. While typically thought of as retirement plans, Roth IRAs should also be considered for education funding. As with traditional IRAs, funds in a Roth account accumulate tax-free (though the contributions are made with after-tax funds), and they may be withdrawn for certain qualified uses prior to age 59 ½ with no tax penalty. One of the qualified uses for a Roth withdrawal is for educational expenses; another provision allows withdrawal of up to $10,000 for the purchase of a first home. To have a Roth account, the child must have earned income equal to or greater than the amount contributed to the account, so this can be a good alternative for future college students with summer or part-time income. The contribution limit for 2026 is $7,500.
4. “Trump” account. Starting in 2025, families with eligible and qualifying children can contribute up to $5,000 per child to a tax-advantaged account until the child reaches age 18. Children born between January 1, 2025 and December 31, 2028 can even receive a $1,000 “starter” contribution from the federal government. The account grows tax-free, and nontaxable withdrawals can be made for education expenses, buying a home, or even saved for retirement.
5. Scholarships and grants. Beyond the self-funded alternatives, those with college-bound students should also be aware of available scholarships and grants. Students with outstanding academic, athletic, or other accomplishments can often qualify for National Merit Scholarships and other financial awards that colleges and universities provide to promising students. Further, many organizations offer grants for students with special interests or circumstances. The Federal Student Aid website has a number of helpful suggestions and links to various nationwide scholarship search sites. Similarly, the College Grant Database allows users to search for various federal, state, and professional sources of grant funding.
At Mathis Wealth Management, we know that helping children and grandchildren secure a quality education is an important goal for many clients. We can offer help and advice tailored to the client’s needs and resources; please contact us for more information.
