College savings made simple: Comparing your options

Whether you're just starting to save for college or your child is nearing graduation, smart planning makes things easier. Discover how a 529 plan could help, explore your financial aid options, and learn practical steps to compare options, set realistic goals, and start building a solid education fund.

What you’ll learn

• Understanding 529 plans
• Key benefits of 529 plans
• Handling leftover 529 funds
• Coverdell ESAs for educational expenses
• Other strategies: Savings bonds and custodial accounts
• Lowering costs with federal education tax credits
• Creating a personalized college savings plan

Understanding 529 plans

A 529 plan is a state-sponsored education savings account that allows assets to be invested for future education expenses. The big advantage is that qualified withdrawals are tax-free, helping your savings stretch further.

You put after-tax dollars into investment funds, and the growth may allow your savings to grow more efficiently, as earnings are not subject to federal taxes when used for qualified education expenses.ⁱ

Anyone can open a 529 plan. Parents or grandparents can start one for a student when they’re young, or a student can even start one themselves. Generally, there are no federal income or age limits, though contribution limits vary by plan and state.

Key benefits of 529 plans

Your 529 contributions are made with after-tax dollars, but investment earnings and qualified withdrawals are federally tax-free. Many states also offer deductions or credits for your contributions. ⁱ

529 plans cover major costs like tuition, fees, books, supplies, equipment, and room and board at eligible schools. They're also flexible. For example, you can use up to $10,000 per year for K-12 tuition, student loan payments, or approved apprenticeship expenses.ⁱⁱ

Note: Only use 529 funds for qualified expenses; using them for anything else will require you pay taxes and penalties on the investment earnings.ⁱⁱⁱ

Handling leftover 529 funds

Worried about leftover 529 money? Thanks to the Secure 2.0 Act, you can now roll unused 529 funds into a Roth IRA for the beneficiary with no taxes or penalties. This can be important if your child gets a scholarship, picks a less expensive school, or skips college entirely.

You can move up to $35,000 of leftover 529 funds into a Roth IRA for the beneficiary, as long as the account has been open for 15 years and funds have been in the account for at least 5 years. These rollovers count toward annual Roth IRA limits, but they give you flexibility if your education costs turn out to be less than you saved.^iv

Coverdell ESAs for educational expenses

A Coverdell Education Savings Account (ESA) is another tax-advantaged way to save for education, though it comes with stricter contribution and income limits. While not as flexible as a 529 plan, a Coverdell ESA can still be a useful part of your college savings strategy if you qualify.ⁱ

To open a Coverdell ESA, the beneficiary must be under 18, and all contributions for that child are capped at $2,000 per year. Exceeding this limit results in penalties, so family members should coordinate their contributions.ⁱ

Coverdell ESAs have income restrictions: Single filers can contribute fully if their MAGI is $95,000 or less, and joint filers up to $190,000. Higher incomes reduce or eliminate your contribution limits.

Like 529 plans, Coverdell ESAs let your savings grow tax-deferred, and withdrawals for qualified expenses are tax-free. The funds must be used by the beneficiary’s 30th birthday or face taxes and penalties, but you can transfer leftovers to another eligible family member.^v

Other strategies: Savings bonds and custodial accounts

Besides 529 plans and Coverdell ESAs, savings bonds and custodial accounts offer more ways to build your college fund. These flexible options can be mixed and matched to suit your family’s needs and savings goals.

U.S. Savings Bonds

U.S. Savings Bonds are a safe, straightforward way to add to your college fund. Series EE and I bonds offer possible tax breaks if you use the interest for eligible education expenses, making them a smart supplement to your other savings options.ⁱⁱ

Custodial Accounts

Custodial accounts (UGMA and UTMA) let adults manage assets for a minor, with potential tax benefits since earnings may be taxed at the child's lower rate. When the beneficiary reaches adulthood (typically 18 to 25, depending on your state), they gain full control of the funds. ⁱⁱ

Financial aid solutions and student loan options

If you know that you will need some type of financial aid, start by filling out the Free Application for Federal Student Aid (FAFSA) to find out what grants, work-study jobs, and loans you’re eligible for. The U.S. Department of Education offers three main types of federal loans to help pay for college, each with specific terms and eligibility.^vii

• Direct Subsidized Loans: These federal loans are available to undergraduate students who demonstrate financial need. The government pays the interest while you're enrolled at least part-time, which means your debt doesn't grow during school. ^vii
• Direct Unsubsidized Loans: Available to both undergraduate and graduate students regardless of financial need. Interest starts accruing as soon as the loan is disbursed, so your balance will grow even while attending school.^vii
• Direct PLUS Loans: Available to graduate students, professional students, and parents of dependent undergraduates. These loans help cover educational expenses that other financial aid doesn't meet, though eligibility depends partly on your credit history. ^vii

Lowering costs with federal education tax credits

Federal tax credits can lower your college costs. The American Opportunity Credit offers up to $2,500 per student, and the Lifetime Learning Credit provides up to $2,000 per tax return. Using these credits helps stretch your college savings further.

The American Opportunity Credit offers up to $2,500 per student for the first four years of college. In 2026, single filers earning $80,000 or less and joint filers earning $160,000 or less will qualify for the full credit. This directly lowers your tax bill, making college more affordable.

The Lifetime Learning Credit gives up to $2,000 per tax return each year for eligible education expenses, no matter the student’s college year. In 2026, it is available for single filers earning up to $90,000 and joint filers up to $180,000, making it a helpful way to reduce college costs over time. ^ix

Creating a personalized college savings plan

Every family has unique needs, so pick the savings options that fit your goals. There’s no single right way, just find the plan that works for you.Mixing options like 529 plans and federal tax credits can help your savings go further. For advice on the latest rules and a plan that fits your family, connect with an Alliant Retirement and Investment Services financial consultant. You can also watch the full webinar on this topic on Youtube.