Smart Ways to Pay for Your Child’s College Tuition

by Darwin on July 7, 2015

With all of the ways to pay for college, it can be confusing to figure out what makes the most sense. Here are some of the best ways to fund your child’s future education and do it without making compromises.

Use a 529 Plan

A 529 plan is one of the most common ways to save money for college expenses. According to, a 529 plan is usually sponsored by the state you live in, but it can also be sponsored by an educational institution.

529 plans also offer tax deductions on all contributions and have no income restrictions, which is a good option if you’re a high income earner.

The custodial fees are also low – just 0.25 to 0.3 percent.

The downside is that it’s very restrictive. Your child must use it for educational expenses, so if your child gets full tuition reimbursement or enough scholarships to pay for college, you have limited options: either use it for college related expenses or use it for another child’s expenses.

Use A Coverdell Savings Account

The Coverdell Education Savings Account is another tax-advantages investment account. The money grows tax-deferred, and it can be withdrawn tax-free. The maximum contribution is $2,000 per year. And, your annual income can effect whether you can contribute to it. Finally, the funds must be used by the time your child is 30.

Use Your Roth IRA

You can also use your Roth IRA to pay for your child’s education expenses and avoid the usual 10 percent early withdrawal penalty. Of course, you may be depleting your own retirement, so proceed with caution.

Use Life Insurance

Whole life, and some types of universal life insurance, can be an excellent way to save money. The key is starting early. Using life insurance as a savings vehicle requires years of planning – about 15 to 20 in many cases.

You must ask your agent to design a special type of contract, called a “high early cash value policy.” These policies are not like your grandmother’s life insurance. A high cash value policy de-emphasizes the death benefit, encouraging rapid cash value buildup in the early years of the policy.

It also drives costs way down, making it a viable savings product.

You should see at least 70 percent of your premium available as cash in the first year of the policy, with the better contracts giving you access to 80 to 90 percent of your premium in the first year.

If you’re buying a whole life policy, this means that you will likely need to talk to an insurance agent who knows how to blend whole life with term insurance, and then “overfund” the policy with paid up additional insurance, to minimize insurance loads and fees.

If you’re buying a universal life policy, you’ll need a solid contract that minimizes the death benefit and insurance costs and maximizes the cash value (insurance agents can select this as an option during the policy design process).

When your child goes off to college, you simply cash in the contract or borrow from the policy to pay the tuition and other expenses. There is no penalty for doing this, and no restrictions on what the money is spent on. If you do cash in the policy, you’ll pay income tax on all of the interest gains, which could be substantial.

If you borrow from the policy, you have two choices: either repay the loan (or tell your child he or she to do it so that they have future cash value to borrow against for other things) or tell the insurer to issue you a reduced paid-up policy, in which case you owe nothing and the policy’s death benefit amount is reduced (but stays in force) for the rest of the child’s life.

Allen Foster has spent a good number of years in a financial planning role. He is always willing to impart his wisdom and ideas to an online audience. His posts can be found across a selection of consumer-orientated websites.

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