Building Bricks of a College Fund Plan

5 min read


College costs continue to skyrocket– at a pace that far exceeds the rate of inflation. But there is a bright side to planning for college expenses, and it’s getting a little brighter all the time – thanks to federal tax breaks that can make paying for college more affordable. The key point to remember is that you can create a college funding plan brickbybrick, by combining a variety of investment accounts, tax benefits and financial aid sources. Here is a quick guide to get you going:

  • 529 Plans[1]—State-sponsored versions of these plans are now available in all 50 states, and you aren’t limited to the plan of your own state. In a 529 Plan, you set aside after-tax dollars[2] on behalf of a beneficiary, and earnings grow on a tax-deferred basis. Distributions are not taxed, if taken for qualifying education expenses. As the account owner, you maintain control of the account and may change beneficiaries, subject to restrictions. In addition to state-sponsored plans, private colleges also may set up a form of Qualified Tuition Plan that allows tuition to be prepaid.
  • Education Savings Accounts—These accounts allow annual contributions of up to $2,000 per child per year. Distributions made for qualifying education expenses are taxfree, and the costs of high school or elementary school tuition may qualify.
  • Loans or Withdrawals from Permanent Life Insurance—Parents often find it convenient to fund part of college costs by taking loans or withdrawals from permanent life insurance contracts – i.e., life insurance with a cash value. In most contracts, loans may be taken taxfree.
  • Traditional IRA Withdrawals—If you have a Traditional IRA, you can make penalty-free withdrawals for purposes of paying qualifying colleges expenses for your child, grandchild or spouse (or even yourself). Ordinary income tax will apply on the amount withdrawn.
  • Roth IRA Withdrawals—If you have a Roth IRA, you can make penalty-free withdrawals for qualified higher education expensesonce your account has been in place for at least five years. There is no income tax due on the amount withdrawn.
  • Federal Tax Credits—Many parents can use federal tax credits to meet a portion of the children’s educational costs. The American Opportunity Tax Credit applies in the first four years of post-secondary education. It’s a tax credit of up to $2,500 and applies to the cost of tuition, fees and course materials. Up to 40% of the credit (a maximum of $1,000) is refundable – meaning even if you owe no income tax for the year, you can get up to $1,000 back from the government if you qualify for this type of credit.
  • Deductible Interest on Student Loans—If your child needs education loans and you repay them, you may qualify to deduct up to $2,500 of the loan interest per year.[3]
  • Employer-provided Education Benefits—Some companies have set up programs that allow the organization to contribute education benefits on behalf of workers and their children. Federal law currently allows up to $5,250 of employer-provided education benefits to be excluded from taxable income.
  • Financial Aid—Today, more and more students are applying for financial aid. In most cases, students must demonstrate financial need to qualify for this type of assistance.

Time Is On Your Side

The more time you have available to save money for educational expenses, the better your chances of meeting your financial goals may be. Keep in mind, too, that the tax benefits and financial aid mentioned above may not be available to everyone. Your qualification for some of these may depend on your Modified Adjusted Gross Income.Your financial professional can help you learn more – and help you identify specific solutions that may work best to help you reach your long-term financial goals, based on your personal situation.


The post was written by Allison Hoyt, JD, CLU, Associate Consultant, Business Resource Center for Advanced Markets at The Guardian Life Insurance Company of America. The information contained in this article is for general, informational purposes only. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.

[1]Before investing in a 529 plan, please consider the investment objectives, risks, charges and expenses carefully before investing. The official disclosure statement and applicable prospectuses, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

[2]Some states allow a state income tax deduction for 529 plan contributions.

[3]The individual who is legally obligated to repay the loan is the only one who may be eligible for any available interest deduction. Consult your financial or tax professional for details.


[1]The individual who is legally obligated to repay the loan is the only one who may be eligible for any available interest deduction. Consult your financial or tax professional for details.


Also published on Medium.


Crystal Wachoski

Our financial advisor gave us great advice. He told us to pay for the A’s & B’s everything else goes on a student loan. That way your child will try harder.

Amber Starr

Great tips! We set up 529’s for both of our kids as soon as they were born. I was lucky enough to have MET tuition that some family members established for me while younger. It was a lifesaver!


These are great tips. I wish we could go back in time and add more to our daughters college fund. Now that she is ready to use it, I can not believe the cost of classes, even community college.

Detroit Duchess

I wish I would have applied for more scholarships when I went to college. I had the first year paid for with scholarships but I sort of fell into them. There are also a lot of jobs that do tuition reimbursement. I worked all throughout college and one of the jobs I had when I got my master’s degree did reimburse me which was great!

Leave a Reply

Your email address will not be published. Required fields are marked *