College Savings Plans and Payment Strategies

Saving for college can be a big undertaking, but there are strategies you can use to make it easier. College savings accounts provide a strategic financial tool for families to prepare for the hefty costs of higher education. These specialized accounts serve as a dedicated vehicle for accumulating funds to cover tuition, fees, and other educational expenses.

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Types of college savings plans

Understanding the intricacies of college savings accounts, from their tax advantages to their investment options, empowers parents and students to navigate the path to higher education with greater financial confidence. Let’s look at seven common strategies you might use to help fund your educational journey.


1. Section 529 plans

A Section 529 plan is a tax-advantaged investment plan, issued and operated by a state or educational institution, that helps families save for education. Section 529 plans1 are named after the tax code that governs them. Almost all 50 states offer these plans, and rules vary by state. In many cases, you don’t have to be a state resident to take advantage of them; in fact, you can invest in multiple 529 plans in multiple states, if desired. However, some state plans offer additional state tax benefits to their state residents.

Related: How to open a 529 college savings account

There are two types of 529 plans:

College savings plans

Generally, college savings plans offer tax-deferred earnings; distributions are tax free if they are used to pay for qualified education expenses (some states offer tax exemptions and deductions, so check around). However, the earnings portion of any nonqualified withdrawal is subject to federal income taxes, applicable state income taxes, and an additional 10% federal tax. Maximum contribution amounts vary from state to state. Please keep in mind that the underlying investment options are subject to market risk and will fluctuate in value.

Prepaid tuition plans

Some universities have set up programs where college expenses can be paid in installments over many years, or in a lump sum prior to attending the school. The advantage is that you can lock in the current price. Any earnings are tax deferred, and distributions are excludable from gross income if they are used to pay for qualified higher education expenses.



2. Coverdell education savings accounts (ESAs)

With Coverdell education savings accounts (formerly known as education IRAs), you can make contributions for each child, until the child is 18.

There are contribution limitations and income eligibility requirements. Money contributed to a Coverdell education savings account may grow, tax deferred, and may be withdrawn—free from federal income taxes—for any qualified higher educational expense incurred by the child before age 30. After that time, any remaining balance must be distributed to the beneficiary. Any gains will be taxed as ordinary income and will incur a 10% penalty tax. State taxes may also apply. The account owner can retain control of the money in the account, if desired. The beneficiary can even be renamed in some cases. Check the IRS website for current contribution limits.


3. Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA)

These custodial accounts allow you to set up an account in the child’s name. You can make transfers to an UTMA/UGMA account on a per-child, per-year basis. Check the IRS website for current contribution limits. Check with your tax advisor prior to making any decisions.

Setting up an UTMA/UGMA account in a child’s name is easy. The account will involve a custodian; your registered representative can guide you in completing the application. Separate accounts are required for transfers to each child. Be sure to provide the child’s Social Security number (not the Social Security number of the person making the gift or that of the custodian). The custodian will have full authority to make decisions, including control over the assets. Since transfers must be permanent, parents can’t gain access to the money for their own use. Also, all assets in the UTMA account will belong to the child when he or she reaches the age of majority. You may also want to consider the possibility that assets held in your children’s names may affect the level of financial aid they’ll be eligible to receive when they apply to schools.


4. Loans

These days, most people borrow at least a portion of the money needed to cover college expenses. You may want your children to look for student loans with special rates and repayment terms. For details on these options, check out the U.S. Department of Education’s site at

The federal government offers Parent Loans to Undergraduate Students (PLUS loans), allowing eligible parents to borrow the full amount of undergraduate tuition, including room and board and any other eligible school expenses minus any aid their dependent child receives from the federal government. The interest rates for loans disbursed after July 1, 2023, and before July 1, 2024, is 8.05%.

Direct subsidized loans are available to undergraduate students with financial need. The school determines how much can be borrowed. And the U.S. Department of Education pays the interest as long as the student is enrolled in school on at least a half-time basis.

Direct unsubsidized loans are available to undergraduate and graduate students, with no requirement to demonstrate financial need. The school will determine how much can be borrowed. Interest on the loan will accrue while the student is in school.

Interest on student loans may be deductible as well. To read more about student loans from a tax standpoint, go to the “Forms and Publications” section of

Helpful Hint…You may want to take a look at your permanent life insurance policies, such as whole life, universal life, and variable universal life, which offer cash value accumulation in addition to their essential financial protection. Over the long term, the cash value accumulation may be significant enough to access for assistance in funding a portion of college expenses if you determine that the full death benefit is no longer needed. (Accessing cash value will reduce the death benefit and available cash surrender value.)

Please note:

You can invest money in an account earmarked for your child’s education costs. Generally, it is better to invest when the child is young (under five years old).

Many people buy zero-coupon Treasuries—known as STRIPS (Separate Trading of Registered Interest and Principal of Securities)—as they are backed by the U.S. government and are noncallable, which means they can’t be called, or redeemed, before the maturity date. STRIPS are not issued or sold directly to investors; they can be purchased and held only through financial institutions and government securities brokers and dealers. Interest earned on STRIPS is taxable in the year it is earned. There are also savings bonds, including the Series EE savings bonds, or education bonds. PLEASE NOTE: Your NYLIFE Securities registered representative does not offer STRIPS or education bonds.


5. Grants

The U.S. Department of Education has the following Student Financial Assistance Programs:

A federal Pell Grant, unlike a loan, does not have to be repaid. Pell Grants are awarded only to undergraduate students who have not earned a bachelor’s degree or a professional degree. The maximum grant for 2024–2025 is $7,395.

There are also Federal Supplemental Educational Opportunity Grants, or FSEOGs, for $100–$4,000 a year. These grants are awarded to students in need of financial aid. U.S. students in approximately 3,800 participating institutions are eligible. Priority is given to students with “exceptional need” and those who are also Pell Grant recipients. These grants do not need to be paid back.

For more information, visit the U.S. Department of Education’s website at


6. Tax Credits

Tax credits are better than tax deductions, as you subtract the credit from your total taxes due. Check the IRS website for the current tax credit amounts, and for more details regarding credits.

The American Opportunity Tax Credit is a tax credit to help with the first four years of tuition of post-secondary education. It is available to tax payers and their dependents. The maximum credit is $2,500 (per student, per year).

The Lifetime Learning Credit is for post-secondary education students. The maximum credit is $2,000 per tax return.

With both programs, your income must not exceed a certain amount to qualify. Also, note that these two credits can’t be claimed if you use an IRA to pay expenses in the same tax year.


7. Financial Aid

There are billions of dollars available each year in scholarships, grants, and work-study programs. Financial aid to middle-income families may be tough to come by, but some universities may be more willing to offer generous financial aid packages.

There are thousands of financial aid programs available. They fall into three general categories:

  • Federal, state, and campus-based grants. (Grants are “free money” generally offered on a financial-need basis.)
  • Student loan programs (from special rate guarantees to special repayment schedules).
  • “Special situation” scholarships (given for achievement without regard to income or assets).

It’s certainly worth contacting your child’s high school and prospective college financial aid office to see if you’re eligible.

HELPFUL HINT… Your role in providing financial support to pay for your children’s college education is crucial. Life insurance can help assure that, if you die and, as a result, your income is lost—your children’s dreams of a college education will not be lost as well.


Savings plans for college FAQs

While 529 plans provide tax-free distributions if they are used to pay for qualified education expenses, contributions are made after taxes, and therefore not deductible. However, many states offer incentives such as tax credits or deductions to in-state participants.


Coverdell ESA contributions are not tax deductible. However, the money deposited in the account will grow tax free until withdrawn.


UTMA/UGMA account contributions are made after taxes, and therefore are not deductible.


For student loans, there is a tax deduction for the interest paid. The maximum deduction is $2,500 a year.


Pell Grants and other similar education grants are considered scholarships for tax purposes, and are therefore tax free, provided they are used for educational purposes.

Nearly all states offer a 529 plan, and you don’t have to be a resident to open an account. However, many states offer unique incentives to account owners who are residents. Additionally, the maximum contribution amounts can also vary from state to state. Contact your financial professional for the current contribution amounts and for more details regarding income limitations.

You may contribute to a 529 plan with a check, electronic bank transfer, Automatic Investment Plan (AIP), payroll contribution, or by rolling over funds from another 529 plan, Coverdell ESA, or other qualified U.S. savings bonds.


Coverdell ESA contributions can be made by anyone but must be made in cash.


UTMA/UGMA account contributions can be made by anyone (parents, grandparents, etc.) through bank wires, check deposits, or direct deposits through the bank.

Connect with a financial professional

Customize a strategy that works best for you.


The information in this article is for educational purposes only and is not intended to be an offer for any specific product. Neither New York Life nor its affiliates are in the business of offering tax advice. You should consult with your professional advisors to examine tax aspects of any topics presented.

1Securities offered by properly licensed registered representatives of NYLIFE Securities LLC (Member FINRA/SIPC) A Licensed Insurance Agency and a New York Life Company, 51 Madison Avenue, New York, NY 10010.