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Compare and contrast: 4 key ways to save for college

Review contribution limits, tax benefits and other differences at a glance as you decide which savings options might work best for you and your future college student.


Richard Polimeni headshot“Ideally, you want your savings to pay for a larger portion of the costs, so you or your child can borrow less.”

— Richard Polimeni, head of Education Savings Programs at Bank of America

WHEN YOU ADD UP THE COSTS of raising a child, education looms large. “Four years of tuition and fees alone at a public in-state college is projected to cost $47,152, if you’re starting school today,”1 says Richard Polimeni, head of Education Savings Programs at Bank of America. At a private college, that amount could top $169,000,1 and at the most elite schools you could spend far more. What’s more, “you can expect tuition costs to rise by about five percent each year,” Polimeni adds. That’s why it’s important to start saving as early as you can. “Ideally, you want your savings to pay for a larger portion of the costs, so you or your child can borrow less.”


“Start by setting up automatic monthly contributions to an account earmarked for college,” Polimeni suggests. Then, as freshman year approaches, you can look for ways to fill in the gaps. Contribution limits, tax benefits, implications for financial aid and other factors differ across the major savings options available. To explore your options, check out the downloadable guide below and begin a conversation with your advisor about how you can fit college savings into your family’s overall financial plan.

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Type of account

How are contributions and withdrawals taxed?

Maximum contribution

Investment options

Who controls the funds?

Potential effect on financial aid

What happens to unused funds?

The bottom line

Make the most of tax benefits

“There are various federal income tax provisions that not only encourage people to set aside funds to pay for higher education costs but could also help offset some of those expenses,” says Mitch Drossman, head of Wealth Planning Strategies, Chief Investment Office at Merrill and Bank of America Private Bank. Those include tax credits for higher education expenses and a deduction for student loan interest. What’s more, you can withdraw funds from individual retirement accounts to cover eligible college costs without incurring additional taxes for early withdrawals, but it’s better to leave those funds invested for your long-term goals, notes Drossman. For more on these tax rules, download the full Bank of America report, “Tax Provisions Related to Higher Education Expenses.”


Average amount of college costs families cover with savings and current income.

Final stretch? Ways to fill in the gaps …

On average, families cover only 54% of college costs with savings and the parents’ and student’s income.4 Another 26% comes from scholarships and grants, with loans covering 18% (friends and relatives kick in the rest). That means that in the final run-up to college, you’ll likely want to look into one or more of these options:


Apply for federal student aid: Start by filling out the Free Application for Federal Student Aid, which you can do beginning October 1 of your child’s senior year in high school. “Everyone should apply for federal student loans and grants, even if you think you won’t qualify,” says Polimeni. Your aid eligibility doesn’t hinge on your income alone, although it is a significant factor. Financial aid awards, which often take the form of student loans, take into account the size of your family (are you sending more than one child to college?), the cost of tuition and your child’s year in college. If necessary, students should consider using federal direct subsidized loans before other types of loans as they generally have lower interest rates and more favorable repayment terms.  


Borrow against your investments: A Loan Management Account® (LMA® account) from Bank of America is a line of credit that allows you to use the value of your eligible investments as collateral. “You can borrow against your account without disrupting your long-term investment plan, and your interest rate will be lower than most other borrowing options,” says Patrick Bitter, a credit and banking product executive at Bank of America. Plus, you can get access to a loan quickly. “When you’re borrowing against your investments, you can set that up within a couple of days,” says Bitter. The LMA account also offers great flexibility; it can be used as needed, with no defined repayment time frame. Just keep in mind that if the value of your investments drops sharply, you may have to repay the loan, move more money into your account or sell some of your stocks or bonds, Bitter adds.


“Your financial advisor can help you evaluate all of these options and determine which might make the most sense for you,” says Polimeni. And planning ahead is key. One more tip: “Involve your child in the process,” he adds. “It’s a great way to kickstart their financial education, and it will help them understand the financial impact of considering one school over another.”


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1 College Board, “Trends in College Pricing and Student Aid 2022,” October 2022. Estimates based on average published tuition and fees for 2022-2023 and 5% annual increases.

2 To be eligible for favorable tax treatment afforded to the earnings portion of a withdrawal from a Section 529 account, such withdrawal must be used for “qualified higher education expenses,” as defined in the Internal Revenue Code. The earnings portion of a withdrawal that is not used for such expenses is subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes. The additional tax is waived under certain circumstances. The beneficiary must be attending an eligible educational institution at least half-time for room and board to be considered a qualified higher education expense, subject to limitations. Institutions must be eligible to participate in federal student financial aid programs. Some foreign institutions are eligible. You can also take a federal income tax-free distribution from a 529 account of up to $10,000 per calendar year per beneficiary from all 529 accounts to help pay for tuition at an eligible elementary or secondary public, private or religious school. Qualified higher education expenses now include expenses for fees, books, supplies and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act and amounts paid as principal or interest on any qualified education loans of the designated beneficiary or sibling of the designated beneficiary, up to a lifetime maximum of $10,000 per individual. Distributions with respect to the loans of a sibling of the designated beneficiary will count towards the lifetime limit of the sibling, not the designated beneficiary. Such repayments may impact student loan interest deductibility. State tax treatment may vary for distributions to pay for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school, apprenticeship expenses and payment of qualified education loans.

3 Contributions during 2023 between $17,000 and $85,000 ($34,000 and $170,000 for married couples electing to split gifts) made in one year can be prorated over a five-year period without subjecting you to federal gift tax or reducing your federal unified estate and gift tax credit. If you contribute less than the $85,000 maximum ($170,000 for married couples electing to split gifts), additional contributions can be made without you being subject to federal gift tax, up to a prorated level of $17,000 ($34,000 for married couples electing to split gifts) per year. Gift taxation may result if a contribution, combined with all other gifts qualifying for the annual gift tax exclusion in the year of contribution, exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. For contributions between $17,000 and $85,000 ($34,000 and $170,000 for married couples electing to split gifts) made in one year, if the account owner dies before the end of the five-year period, a prorated portion of the contribution may be included in their estate for estate tax purposes.

4 Sallie Mae and Ipsos, “How America Pays for College 2022,” August 2022.


Source: Sallie Mae and Ipsos, “How America Pays for College 2022,” August 2022.


Merrill, its affiliates, and financial advisors do not provide legal, tax or accounting advice.  You should consult your legal and/or tax advisors before making any financial decisions.



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