529 Plans and More: Innovative and Effective Ways to Pay for Education

Sep 20, 2023

A 529 plan is a great way to invest for future education costs, but there are also other options to raise the funds you need.

Key Takeaways

  • Earnings in a 529 plan may grow tax-deferred, and withdrawals are tax-free if used for qualified education expenses.
  • A portfolio of zero-coupon municipal bonds can also be a smart way at times to save for college.
  • The best way to pay for college will vary depending on your individual circumstances.

Education has outgrown school. What do we mean by that? Even a generation ago, most people tended to think of schooling as finite stages of growing up. Yes, there were costs involved, but like the cuts and scrapes of childhood, they would heal and become a distant memory.


Today, we talk about education as a lifelong journey. It starts with school, but it never really ends. The associated costs have also matured and now resemble longer-term budget items, such as housing and health care. Paying for education has become a major investment—one that often requires years of careful planning. As the costs keep rising, you should approach funding educational expenses, such as tuition, extension programs and advanced professional training, like any other kind of investment that needs a strategy built for your specific needs.


One of the most challenging aspects of crafting such plans is predicting the future educational funding needs of your loved ones, or yourself.  The right solution may be a mix of tried-and-true tools with innovative, lesser-known strategies to help plan for the uncertainty.


Here are six strategies that may help cover today’s spectrum of expected, and sometimes unexpected, educational costs.

  1. 1
    Get Time on Your Side

    For 2023, single persons can make contributions of up to $17,000 a year into a 529 plan—and married couples can contribute up to $34,000—without triggering the federal gift tax, assuming they did not make any other gifts to the same person. They can also take advantage of a feature unique to 529 plans that allows them to make five years' worth of contributions at once without triggering the federal gift tax1. If they don’t make additional gifts to the same person during the same five-year period, an individual can contribute up to $85,000 for 2023 and a married couple filing jointly can contribute up to $170,000 (these amounts may change in the future due to cost of living adjustments), provided they make the required election on a gift tax return for the year of the contribution.


    Your Unified Lifetime Gift Credit, currently $12.92 million, may also be available to fund your account up to the account maximum contribution limit, which varies by state.

  2. 2
    Zero in on Zero-Coupon Muni Bonds

    A portfolio of zero-coupon municipal bonds can be a smart way at times to save for college. This type of fixed income security does not pay interest but instead can be bought at a substantial discount to its face value, which it pays in full at maturity, providing a lump sum equal to the initial investment plus imputed interest. A big plus with these bonds: When purchased from a government entity, their interest is often exempt from federal income tax and usually from state and local income tax as well. And if you need a specific amount of funds at a particular date—for example, when paying college tuition—your Financial Advisor can structure your portfolio so that the bonds mature right before payments would be due.

  3. 3
    Make Smart Debt Choices

    When a gap looms between the cost of education and the ability to pay when due, most families reach for student loans by default. But they’re not always the right option. Interest rates on some student loans can exceed 7%; what’s more, for unsubsidized loans, that rate begins accruing the minute the loan is made, even though payments don’t start until after your child graduates. In addition, student loans are generally not dischargeable in bankruptcy proceedings, and your Social Security benefits may even be garnished to collect balances owed.


    Many parents understandably want their children to have some “skin in the game”—and student loans certainly lock in the need for long-term responsibility. But you may want to balance that against the weight of educational debt that many students end up carrying long after graduation.


    One strategy that parents often overlook is to borrow against their own assets. Parents can then make a loan directly to their children to pay for education. As a borrower, the child must still bear the responsibility of paying back the loan, which typically may carry lower interest rates. The family “lender” may choose to have the child refinance the loan upon leaving or finishing school, or, if it is not paid back, the “lender” may choose to deduct it from an inheritance or simply forgive the loan to the child.


    529 plan account owners may also withdraw tax-free up to $10,000 to pay student loans, which often account owners plan to do if the student successfully completes their studies.

  4. 4
    Plan for the Road Less Traveled

    The best-laid plans must account for potential detours. Some children choose to take a gap year for travel, volunteering, or real-world job experience. Others may choose to attend college overseas, or study abroad for a semester.


    In many circumstances, you may be able to use 529 plan funds tax-free to pay for those options or some expenses related to them. For example, 529 funds may be used for eligible international schools. Additionally, there’s no time limit on 529 plans. The funds can stay invested and continue compounding while your child explores their passions.


    To cover other potential out-of-pocket expenses not eligible for tax-free 529 plan account withdrawals, such as tutoring and test preparation courses, build an educational cost “safety net,” which may include other savings vehicles and an alternative source of credit.

  5. 5
    Provide for Special Needs

    Planning for children with special needs also requires additional considerations and expenses. You may need funds for occupational, speech or other therapies, in addition to educational expenses. For these non-educational expenses, you should consider funding a health savings account (HSA), if you are eligible. These accounts allow you to use pretax dollars to offset medical-related expenses.


    You can also set up a special-needs trust that benefits the child. Parents and grandparents may also contribute to such a special needs trust, but should be mindful of potential tax implications at the time of transfer. Be sure to engage a special-needs attorney and consult your tax advisor and Financial Advisor in such cases.


    Another option is to open a custodial account for your child, under the Uniform Transfer to Minors Act (UTMA) or similar rules. Assets in the custodial account can be used to pay any types of expenses associated with the beneficiary, including any non-educational expenses, such as any expenses associated with a child who has special needs. Be sure to consult your Financial Advisor to understand the implications of saving for educational expenses through a UTMA, as it may affect financial aid eligibility.

  6. 6
    Fund Your Own Educational Needs

    Sometimes the education you wish to fund is your own. If you’re planning to pursue a degree, it may be a good idea to name yourself the beneficiary of a 529 plan and use those funds to pay for your education. There are no age or time restrictions imposed by IRC Section 529 but check if the 529 plan under consideration has any such limitations.

A New Role for Roth IRAs?

With the passage of the SECURE 2.0 Act, 529 account owners may be able to roll their leftover assets into a Roth IRA—for a designated beneficiary—making 529 plans an even more robust solution for long-term financial planning2.


The SECURE 2.0 Act contains dozens of provisions that aim to strengthen the retirement system, including raising the age at which many individuals must begin taking required minimum distributions (RMDs), higher catch-up contributions and other improved opportunities to save for retirement. Recognizing the importance of 529 plans in planning for the future, the Act also helps 529 plan account owners, regardless of their income, by permitting tax-free and penalty tax-free rollovers of certain unused funds into a Roth IRA.3

Consider Your Financial Big Picture

Always keep your overall financial well-being in mind. For example, avoid underfunding your retirement in favor of education. Seek good financial advice to determine the best funding ratios for you and your family, especially if you have multiple financial goals.


Connect with your Morgan Stanley Financial Advisor to identify an education funding strategy that works for your individual circumstances.

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