College Savings Strategies—Invite Your Village
From accelerated gifting to crowdfunding to special considerations for grandparents, learn different 529 college savings strategies that include family and friends.
Key Takeaways
College costs are not cheap and continue to grow each year. Most of the time parents and students bear the weight of the expenses on their own or through loans.
Some college savings strategies include a much wider circle to help your student achieve their college dreams, and they may be things you haven’t considered.
Review three strategies that can help friends and family share in helping a student achieve their college dreams that don’t feel weird or out of the blue.
They say it takes a village to raise a child. What if the village could also help with college savings? Here we explore strategies for family and friends to help with the costs that make sense for givers, and some of which may also let them benefit from 529 tax advantages.
Soaring College Costs Call for More Savings Strategies
You’ve heard it a million times: College costs are skyrocketing, and they increase every year. Most Americans rely on parent income or savings and/or loans by parents or students to cover the costs.1 But even with those resources, many people have savings gaps. And no one wants themselves or their students bogged down with more student loans.
Families use many different ways to pay for college, including current income, savings, scholarships or grants and loans. For the 2023-2024 school year, 23% of funding came from parent and student loans, piling on debt for families and young adults.
Source: How America Pays for College 2024, Sallie Mae.
College Costs Are Rising … But by How Much?
When considering strategies for funding college, it’s important to understand the costs to make the best choice for your student and your money. College costs can quickly feel overwhelming, even considering the price differences between two- and four-year public and private options.
Sticker Shock: Prices for One Year of College
Average Annual Tuition and Fees, Plus Room and Board
Public | In-State Public Four-Year | Out-of-State Public | Private Nonprofit | |
|---|---|---|---|---|
2023-2024 School Year | $13,900 | $24,030 | $41,920 | $56,190 |
% Change from Previous Year | 2.6% | 2.5% | 3.0% | 4.0% |
Source: College Board Trends in College, Pricing and Student Aid, 2023-2024.
College Savings Strategies—Fill Funding Gaps With Your Peeps
Parent-owned 529 and other savings, student loans, scholarships and grants—all these added up don’t always cover the entire costs of an education. Here are three options for 529 college savings you may not have considered but could help fill the gaps without additional loans needed.
1. Crowdfund College—Invite the Village
Crowdfunding has become popular for a variety of expenses, and it can be a college savings strategy too. Small amounts from lots of people have the potential to grow over time. Family members and friends may already give money for holidays, birthdays and other milestones. When you add up these gifts, you’ve got another tool to save for college.
What if you replaced a portion of your usual gift amount with contributions toward college savings? And what if your friends and family did the same? That’s the power of crowdfunding, and it can be a great way to get additional funds in a 529 plan.2
Digital Crowdfunding Makes It Even Easier
With the rise of crowdfunding has come specific online tools catered to raising money in 529s. Students can invite friends and family to send cash gifts via online gifting platforms in lieu of traditional presents for birthdays and other celebrations.
Many state 529 education savings programs make it easy to contribute through an online contribution, gift card or mailed-in check. You can direct family and friends to a personalized online gifting page where they can contribute money straight from their bank accounts. And best of all, there are no fees for many of these gifting services.
For example, the Ugift® feature of Kansas’ Learning Quest® 529 Education Savings Program allows you to share a unique gifting code with family and friends so they can transfer funds directly to the account.
Still, asking friends and family may not be the easiest thing to request. Instead of just asking, consider reframing the gift in the minds of loved ones. Here are some tips.
Rethink the Wish List: How to Ask for College Money
For the “I never thought of it” crowd: Make sure they know college savings is a real, welcome gift option.
For the “I want to give a real gift” crowd: Suggest that money for college be a portion of a regular present instead of either/or.
For the “Kids have too much stuff” crowd: This is the perfect gift to avoid adding more toys to the pile.
2. Give Big With Accelerated Gifting (and Get Tax Advantages)
Accelerated gifting, sometimes called "frontloading" a 529, is possible due to a special 529 tax rule. It allows parents, grandparents or anyone to fast-track a sizeable gift to a future student and spread the tax treatment over five years. In addition, an accelerated gift may reduce the benefactor's estate taxes.
Accelerate Gifts, Not Accelerated Taxes
For any year, 529 gifts can be given up to a certain amount without triggering federal gift taxes . The accelerated tax provision allows for five times the annual limits, also without prompting gift taxes. In addition, 529s do not have income limits. Investors at any income level can open and contribute to an account.
2024 Federal Gift Tax Exclusion
Individual | Married Couple | |
Annual Gifting | Up to $18,000 per recipient | Up to $36,000 per recipient |
Accelerated Gifting* | Up to $90,000 per recipient | Up to $180,000 per recipient |
*Accelerated gifting: Elect to treat the gift as if it were made evenly over a five-year period.
More for College; Lower Estate Taxes
For a 529 beneficiary, an accelerated gift allows more money the potential to compound and grow tax-deferred for education expenses. The larger one-time amount may add up to more than annual contributions over the same number of years.
An Accelerated Gift May Add Up to More for College
The hypothetical situation contains assumptions that are intended for illustrative purposes only and are not representative of the performance of any security. It compares a one-time investment of $75,000 held for 18 years to 18 equal annual investments that total $75,000 and assumes a 6% interest rate. There is no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell securities. Source: Time Value Calculator, Financial Calculators from Dinkytown.net, 2024.
529 gift-givers benefit because the accelerated gift amount reduces their taxable estate value. But that's not all. Transferring wealth as a 529 gift can provide greater potential for those with more than one student needing college funds. As illustrated here, there is no limit to how many students a gift giver can bestow an accelerated gift.
A financial professional can help you decide if accelerated gifting is the right path for your student and estate plan. In addition to other 529 contribution rules, keep these in mind:
- Gift lowers your estate value quickly. The accelerated gift exits your estate immediately instead of over five years. Consider other gifts you might make to the beneficiary during the same five years and potential gift tax implications if you exceed annual limits.
- Five years is the only option. Accelerated gifts are pro-rated over five years at 20% each. You cannot spread the gift over fewer, or more, years. Additionally, the entire gift must fall under the tax treatment. For example, if you gift $75,000, you cannot choose to have $55,000 subject to the five-year treatment and $20,000 not.
- Shrinking the estate does not mean losing control. For 529s, if you are the account holder, you control the assets and can revoke a gift if circumstances warrant. In doing so, however, the value of the gift returns to the estate.
- What happens to the money if you don’t live the five years. If you pass away during the five years, the remaining contributions return to your estate. For example, if you pass away in year three, the last two years of contributions would be returned to your estate and could be subject to estate taxes.
3. Grandparents: Consider Your College Savings Strategies
Helping a grandchild fund their education benefits not only the student but also grandparents. Grandparents may likely be in a good position to help and already be thinking about their financial legacy. Now, one of the barriers for grandparents is gone.
Once upon a time, grandparents owning a 529 account for their grandchildren could have impacted the student’s financial aid eligibility once the funds are withdrawn and used to pay for college expenses. That is no longer the case due to recent changes in the Free Application for Federal Student Aid form.
Grandparents can either open their own 529 account for a grandchild or contribute to the parent’s 529. Here are three ways grandparents can help pay for college, in addition to the accelerated gifting already mentioned. Note, you don’t have to be a grandparent to help a future student. Any family member or friend can also use these strategies for an important child in your life.
Make Recurring Gifts With Required Minimum Distributions (RMDs)
Don’t need the money from your RMD for essential expenses? Consider making your withdrawal a recurring gift for your grandchildren. Depositing savings into a 529 plan is easier than you may think, even if you choose to add to the parent’s 529. In fact, with the Learning Quest 529 Education Savings Program , the account owner can share a Ugift® code with grandparents and even set up a gifting web page.
Pay Student Loans With a 529
One option for grandparents is to wait until after the child graduates to use the funds and help the student pay off any loans. The SECURE Act allows people to pay up to $10,000 in loans per student using 529 plans. Also note that student loan payments can be made for the beneficiary or sibling of the beneficiary, so a family with two children can pay up to $20,000 towards the loan.
Remember Tax Benefits Are for You Too
Anyone can open a 529 plan—grandparents, aunts, uncles and friends—or they can contribute to an existing 529 owned by the parent or someone else. Earnings in the account grow tax-deferred at the federal and state level and can be withdrawn tax-free for qualified education expenses. Some states also offer state tax deductions for contributions to a 529 plan. And there are no income or age restrictions on who can open an account.
The earnings portion of non-qualified withdrawals is subject to federal and state income taxes and a 10% federal penalty.
Still need more college ideas? Here are some other ways to help pay for college that don’t include family and friends:
- Co-op schooling. Some colleges offer co-op, or cooperative education, opportunities, giving students hands-on, paid job experience while earning their degree. Whether full or part time, this on-the-job experience means students can earn money to help cover the cost of education.
- Military tuition assistance. Active duty, National Guard and Reserve component service members are eligible to have up to 100% of their tuition expenses covered.
- Specialty scholarships. Scholarships don’t always have to be education-based. Cultural organizations or hobbyist groups also offer scholarships for students. Anything from being a twin to competitive yo-yoing may help contribute to funding for school.
- Other investments accounts. A CESA, also known as a Coverdell Education Savings Account, is a tax-advantaged account that helps parents save for their children’s education, as long as they’re under the age of 18.
What Might Hold Your Circle Back From College Gifts?
Beyond wondering if college savings is the “gift” it truly is and even with the tax advantages, some family and friends may believe 529 plans are too rigid. For instance, they may be reluctant when a child is young because they don't know if the child will or won't go to college. If the child is older, they may think it's too late to start saving (but it's not).
Your circle also may not know the qualified expenses 529 funds can be used for, such as vocational schools, room and board, and books. Qualified expenses also include tuition for private K-12 schools, and the $10,000 toward student loans mentioned previously.
What if the child doesn't attend college or gets a full-ride scholarship? Account owners can transfer the funds to another beneficiary—another child, grandchild, or even themselves. In addition, starting in 2024, up to $35,000 from a 529 plan can be transferred to a Roth IRA owned by the beneficiary and there are specific guidelines to follow.3
The ability to transfer money from a 529 to a Roth IRA is a huge benefit and offers family and friends the flexibility they may be looking for. It also gives them a way to jumpstart retirement savings.
The availability of tax or other state benefits (such as financial aid, scholarship funds and protection from creditors) may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions, or other factors.
Gifts (of Any Size) Can Help Add Up to Big Dreams.
Helping a student pay for college with a 529 plan can be a rewarding endeavor and not just because you or someone in your circle gets potential tax advantages. It can set the students in your life on the path to reaching their education goals. It’s a gift they won’t forget.
Authors
Give the Gift of a Future
Learn more about the benefits of a 529 plan from a Learning Quest Specialist.
How America Pays for College 2024, Sallie Mae.
Tax advantages may differ for friends and family members who donate to a 529 plan through crowdfunding.
To be eligible to roll over funds from a 529 to a Roth IRA, you must have had the 529 account for 15 years and no contributions or earnings on contributions from the last five years can be transferred. Transfers are subject to annual Roth IRA Contribution limits. For additional information, visit Frequently Asked Questions | Kansas Learning Quest .
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.
You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
No additional gifts can be made to that beneficiary over the next four years after the year in which the one-time gift is made.
If the donor of an accelerated gift dies within the five-year period, a portion of the transferred amount will be included in the donor's estate for estate tax purposes. Consult with a tax advisor regarding your specific situation.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
Gift contributions received by the Learning Quest Plan will be invested according to the allocation instructions on file for the account at the time the gift contribution is transferred into it. Gift contributions transferred into the beneficiary’s account shall be governed by the terms and conditions of the Learning Quest Handbook. There may be tax consequences of gift contributions invested in a 529 account. The Plan reserves the right to invest gifts received into the beneficiary’s account regardless of whether the account has been previously closed.
Before investing, carefully consider the plan's investment objectives, risks, charges and expenses. This information and more about the plan can be found in the Learning Quest Handbook, available by contacting American Century Investment Services, Inc., Distributor, at 1-800-579-2203, and should be read carefully before investing. If you are not a Kansas taxpayer, consider before investing whether the beneficiary's or your home state offers a 529 Plan that provides its taxpayers with state tax and other benefits not available through this plan.
As with any investment, it is possible to lose money by investing in this plan. The value of your Learning Quest account may fluctuate, and it is possible for the value of your account to be less than the amount you invested.
Notice: Accounts established under Learning Quest and their earnings are neither insured nor guaranteed by the State of Kansas, the Kansas State Treasurer or American Century Investments.
Administered by Kansas State Treasurer Steven Johnson
Managed by American Century Investment Management, Inc.
American Century Investment Services, Inc., Distributor