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Saving for college: 3 ways to build a nest egg for your kids’ education

These options can help make paying for higher education easier. Here’s what you need to know to pick the right plan for you.

PROVIDING A COLLEGE EDUCATION is increasingly a delicate balancing act. On the one hand, there are clear economic advantages — college graduates earn far more throughout their professional careers and are much less likely to be unemployed — in addition to the social networks and emotional maturity that can provide benefits for a lifetime. On the other hand, the cost of a college degree has grown so high it can have a lifelong knock-on effect, impeding the ability to purchase a home, save for retirement or build long-term wealth.1


Average amount of savings and current income that families put toward college costs annually2

The key to keeping long-term debt to a minimum is to start saving for education as early as you can, says Richard Polimeni, head of Education Savings Programs at Bank of America. “Ideally, you want your contributions to pay for a larger portion of the costs, so you or your child can borrow less.”


From socking away a little at a time over decades to making windfall contributions, there are a few ways you can build an education nest egg for your kids — and many come with significant income tax advantages. To explore your options, check out the guide below and begin a conversation with your advisor about how you can fit college savings into your family’s overall financial plan.

Compare these 3 ways to save then start a planning conversation with your financial advisor


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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

Final stretch? Ways to fill in the gaps

On average, families cover only 50% of college costs with parents’ and students’ savings and income.4 Another 29% comes from scholarships and grants, with loans covering nearly 20% (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:


Amount of college costs that families cover through savings and current income.4

  • Financial aid. Since aid, which often takes the form of student loans, doesn’t hinge on income alone, “everyone should apply for federal student loans and grants, even if you think you won’t qualify,” Polimeni says. Start by filling out the Free Application for Federal Student Aid, which you can do beginning in the first half of your child’s senior year in high school.
  • Student loans. If you need to borrow, consider using federal student direct subsidized loans first as they generally have lower interest rates and more favorable repayment terms.
  • Other borrowing options. Alternatives to student loans include a line of credit backed by your investments. With Bank of America’s Loan Management Account®, for example, “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. Keep in mind that if the value of your investments drops sharply, you may have to repay the loan sooner than planned, move more money into your account or sell some of your stocks or bonds, he 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 kick-start their financial education, and it will help them understand the financial impact of considering one school over another.”

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1 Education Data Initiative, “Student Loan Debt and Homeownership,” July 2022.


2 Sallie Mae and Ipsos, “How America Pays for College 2023,” August 2023.


3 To be eligible for favorable income 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 may 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 income 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.


4 Contributions during 2024 between $18,000 and $90,000 ($36,000 and $180,000 for married couples electing to split gifts) made in one year can be prorated over a five-year period without subjecting the donor  to federal gift tax or reducing your federal unified estate and gift tax credit by filing an election on a timely filed federal gift tax return, Form 709. If you contribute less than the $90,000 maximum ($180,000 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 $18,000 ($36,000 for married couples electing to split gifts) per year. Gift taxation or the use of the account holder’s federal gift tax exemption 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 federal gift tax exclusion amount remaining for a given beneficiary in the year of contribution. For contributions between $18,000 and $90,000 ($36,000 and $180,000 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 the account owner’s estate for federal estate tax purposes.


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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