6 savings options for college

Options for college savings are wider than you might think. Explore six different types, from life insurance to Roth IRAs, to find the right combination for you.

Photo of a man and child reviewing ways to save for college on a computer.

5 min read | July 30, 2021

You don’t have to save for the whole college bill—in just one account—before your child graduates from high school. A few savings strategies can help get to your goal, though.

“You can fund education from a variety of accounts,” says Heather Winston, assistant director of financial advice and planning at Principal^®. “The important thing is to save regularly and to understand what each college savings option means specifically for you and your family.”

Graphic stating that the average cost of one year of college is $36,000.

Ready to get started or speed up your college savings plan? One (or more) of these six options can help.

529 college savings plan

What it is	Investment account operated by a state or educational institution to help people save for college.
What it covers	Tuition, fees, books, computers and related equipment, supplies, and special needs. Some room and board at eligible colleges and universities. Up to $10,000 in tuition expenses at private, public, and religious K-12 schools.
Tax, fee, and aid implications	Some states offer tax benefits. No federal tax, including potential earnings, if used for qualified education expenses. Tax implications if you’re not the parent of the beneficiary, or for money contributed above annual gift exclusion amounts. (Check with your tax advisor.)
Controlled by	The account owner.
Limits	None.
Good for	Those who want money to be used specifically for education, have multiple people contributing (parents, grandparents, others), or want the flexibility to change beneficiaries if needed.
More information	Compare 529 plans.

Roth IRAs

What it is	Retirement savings accounts that can be used to fund qualified education expenses. (Learn more about Roth IRAs.)
What it covers	Tuition, fees, books, computers and related equipment, supplies, and special needs. Some room and board at eligible colleges and universities. Up to $10,000 in tuition expenses at private, public, and religious K-12 schools.
Tax, fee, and aid implications	Early withdrawal penalties waived when used and withdrawn correctly for qualified expenses (but taxes may still be due on potential earnings withdrawals). Doesn’t count as parental assets under federal formula for student financial aid. (Check with school on specific formula differences.) Withdrawals of principal and interest are counted as income on financial aid application. Investment earnings can be withdrawn tax-free after five years of the account being established and reaching the age of 59½.
Controlled by	The account owner.
Limits	Current yearly contribution and income limits.
Good for	Those who want to be able to use funds for education or retirement and are OK with a limit on contributions.
More information	Find out more about using Roth IRAs and 529 plans for college savings.

Coverdell Education Savings Accounts (ESAs)

What it is	Qualified education expenses for someone you designate as the beneficiary.
What it covers	Tuition, fees, books, supplies, equipment, and special needs. Room and board for students going to school at least half-time. Additional categories of K-12 expenses.
Tax, fee, and aid implications	No tax advantages for contributions. No federal taxes on withdrawals or potential earnings if used for qualified education expenses. If account money is owned by parents, 5.64% of the assets are counted against federal financial aid.
Controlled by	Account owner until beneficiary turns 30; beneficiary can be changed.
Limits	Maximum of $2,000 with an income phase out.
Good for	Those who want to use funds for college and/or K-12 education and are OK with the lower max contribution per year.
More information	The IRS provides more information about these accounts.

Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA)

What it is	A UTMA, adopted by nearly all states, is a tax-effective way to transfer assets to minors without establishing a special trust. The similar UGMA, allowed in all states, is an account at a bank or brokerage.
What it covers	No restrictions on use.
Tax, fee, and aid implications	Considered student assets on the FAFSA^®.
Controlled by	Whoever opens an account (doesn’t have to be a parent) until the child gains ownership (generally 18 to 21 years old, depending on the state).
Limits	UTMA can include almost any asset, even real estate. UGMA is limited to cash, securities, and insurance policies.
Good for	People who have a significant amount of money to contribute (though be aware of gift tax rules) and are OK with the funds being potentially used for something other than education.
More information	Learn more about how these affect aid eligibility.

U.S. Savings Bonds (United States Savings Bonds)

What it is	Includes Series EE (issued after 1989) and Series I bonds, all backed by the U.S. government, when used to pay for qualified education expenses for you, a spouse, or a dependent.
What it covers	Tuition and fees.
Tax, fee, and aid implications	Interest earned may be exempt from federal taxes, but tax advantages phase out over certain income limits. Interest is usually exempt from state and local taxes. Generally have lower rates of return, which may not keep up with the cost of college inflation.
Controlled by	Specific rules regarding who purchases the bond, how funds are used, and how they’re reported to the IRS.
Limits	Annual purchase limits ($10,000 per bond type per electronic purchase).²
Good for	Savers who want a lower risk investment.
More information	The Bureau of Public Debt has purchase details.

Life insurance

What it is	A life insurance policy on the child or parents that has a cash value which you may be able to access to help cover college costs, depending on your policy.
What it covers	Anything (not just education).
Tax, fee, and aid implications	Premium payments are made with after-tax money; no taxes on the growth of the cash value. The policy’s value isn’t counted as an asset when applying for federal financial aid. Loans you take against an active policy’s cash value are income tax-free. Cost and fees may be higher than your typical 529 or Coverdell, mainly due to the cost for your insurance coverage plus any policy charges and fees.
Controlled by	The policy owner.
Limits	Some limits to the amount of premium policy payments you can make to maintain the income tax-free status of withdrawals.
Good for	Someone who needs protection for their family or business and a way to fund other expenses down the road (which could include college).
More information	Talk to a financial professional to see if this is an option for you.

Next steps

Interested in learning about the Principal 529 plan, Scholar’s Edge? Visit scholarsedge529.com.
Discover real-life tips on how to talk to your kids about college costs.

Education

Investing

Budgeting

1 https://educationdata.org/average-cost-of-college

2 https://www.treasurydirect.gov

Investing involves risk, including possible loss of principal.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professional or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Investment advisory products offered through Principal Advised Services, LLC. Principal Advised Services is a member of the Principal Financial Group®, Des Moines, IA 50392.

Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Co. Plan administrative services offered by Principal Life. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., 888-774-6267, member SIPC and/or independent broker/-dealers. Referenced companies are members of the Principal Financial Group®, Des Moines, IA 50392.