Back view of parents looking at U-Nest saving for college iPad screen on the couch.

We want to help all parents by addressing the most common questions about saving for their children’s education.

What is the best way to save for my child’s future?

A 529 plan is the best way to save for your kids, hands down! It is an investment account designed for education, which grows tax-free over the course of your child's lifetime. When you compare it to other types of accounts, it’s impossible to beat the tax savings, parental control, high contribution limits, and financial aid treatment of a tax-advantaged 529 college savings plan. Here are the benefits, to name a few:

  • Investment Benefits
  • Tax benefits
  • Gift Tax Benefits
  • Parental Control
  • Asset Protection
  • Low Cost
  • Minimal effect on Financial Aid eligibility
  • Contributions from friends and family
  • 529 Plan Advantages – Made Simple for You Only Through U‑Nest

Why is saving for college with a 529 plan better than a regular savings account, life insurance, IRA, or investment account such as UTMA/UGMA?

Table below provides a comparison of different options:

529 Plan Savings Account Life Insurance Retirement Account UTMA/
Designed for children
Investment returns
Tax benefits
Low Cost
Parental Control
Friends can gift

What happens to my account if my child does not go to school?

Sometimes the future can be uncertain, but do not worry! If your child decides not to pursue higher education, you have three options:

  1. You can change the beneficiary at any time to another child, a family member, or even to yourself.
  2. You can keep the money in the 529 account in case your child decides to pursue college or a graduate degree in the future (there is no requirement to withdraw funds at the age of 18).
  3. Lastly, you can take the money out. In this case the earnings will be subject to the federal income taxes and any applicable state income tax. In addition, there will be a 10% federal tax penalty, but only on the small portion of earnings, not the deposits you have made.

How will my college fund affect my child’s financial aid eligibility?

In fact, your college savings account will have a minimal effect on the amount of aid you receive and will end up helping you more than hurting you. A 529 is considered a parental asset with FAFSA, so it only affects your Expected Family Contribution (EFC) (the number that determines your child’s eligibility for need-based federal student aid) by, at most, 5.64% of your 529 assets. Compared to the 20% on student assets like UTMA and UGMA, this is a much better option. It’s good to know that even if financial aid helps your child pay college tuition, you may still use your college savings plan to pay for housing, books, computers, and other educational expenses.

What happens to my plan if my child gets a scholarship?

Receiving a scholarship would be excellent news! Even better news is that it will not greatly impact your child’s college savings plan. If your child receives a qualified scholarship, account assets up to the amount of the scholarship may be returned to you without imposition of the additional 10% federal tax on earnings. In addition, scholarships often only cover tuition, while funds from 529 plans can be put toward a variety of qualified education expenses: textbooks, computers, and room and board. These fees aren’t cheap and add up quickly.

We have more answers to your questions: FAQ