Understand your college savings options

With the rising cost of education, saving while your children or other loved ones are still young can help ease the impact of college expenses. Some savings options offer tax-free investment growth and other advantages, while others allow you to use the funds for non-college needs if plans change.

According to the College Board’s Trends in College Pricing report, the average cost of attending a four-year public college as an in-state student during the 2025–26 school year is $11,950. For out-of-state students, the average cost is $30,780 — before accounting for housing, books or other expenses.

Even if you can’t save enough money to cover the full cost of college, having money set aside can reduce the amount you or your student may need to cover with student loans. Below are common savings options for higher education expenses.

529 plans

A 529 plan is the most widely used college savings vehicle and allows you to save for a child’s or other beneficiary’s education expenses. Account earnings grow tax-free, and withdrawals used for qualified education expenses are federal income tax-free. Many states also offer tax benefits.

Anyone can open a 529 account, and anyone can be a beneficiary. That makes 529 plans a good option for grandparents looking to help their grandchildren save for college. You can even open a 529 plan for yourself if you plan to continue your education.

Funds in a 529 account can be invested in a limited menu of options chosen by the plan provider. In addition to higher education costs, 529 funds can be used for K–12 tuition, student loan repayments, apprenticeships and professional certifications. Some plans also offer prepaid tuition options at eligible in-state public colleges.

If the original beneficiary doesn’t use all the funds, you can transfer them to another qualifying family member. In addition, up to $35,000 in unused funds may be rolled into a Roth IRA for the beneficiary, subject to certain rules.

Coverdell Education Savings Account (ESA)        

A Coverdell ESA is a type of trust or custodial account designed for qualified education expenses from kindergarten through college. Like 529 plans, earnings grow tax free, and qualified withdrawals are federal income tax-free.

Coverdell accounts offer broader investment choices than 529 plans, but annual contributions are limited to $2,000 per beneficiary and are subject to income restrictions.

Custodial accounts

Custodial accounts, such as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, are set up for a child and managed by a parent or other custodian.

The accounts let parents take advantage of the gift tax exclusion and control how the money is invested and spent while the child is a minor. Because they are brokerage accounts, UGMA and UTMA accounts also offer investment flexibility, and the assets do not have to be used for education expenses. For that reason, custodial accounts are often used to supplement a 529 or Coverdell account as a way to save for education-related expenses not covered by those plans, such as a car used for travel to college.

However, depending on the state of residence, the child gains control of the assets as soon as age 18 and can use the funds for any purpose. Also, the federal tax exemption for account earnings is capped at the 2026 “kiddie tax” limit of $1,350.

Get professional guidance

For more information on saving for college, contact your EY Navigate™ financial planner. Your planner can help you explore which college savings account may best meet your needs.