A college education is one of life’s most important investments, the success of which can have a major impact over one’s lifetime. The average college-educated person makes approximately $1 million more during their lifetime than a non-college- educated person.

However, the continually rising cost of higher education leaves our children and grandchildren facing the prospect of living with debt for years to come. More than 44.7 million Americans have student loans on file and, according to the Federal Reserve, the average college debt among student loan borrowers in America is $32,731. Of course, many young people today are strapped with much higher debt . On a positive note, there are several ways that you can help.

College

Source: JP Morgan Asset Management. This hypothetical example illustrates the future values of different regular monthly investment for different time periods. Chart also assumes annual investment return of 6%, compounded monthly.

The two investment options for college savings most frequently leveraged are a 529 plan and a brokerage account . Many of you have children or grandchildren that you would like to support in their college efforts, so we’ve broken down some pros and cons of these two popular options.

Whether you choose a 529 Plan, a brokerage account, or a combination of both, the earlier you start the easier it will be to build the all-important college nest egg. Also, keep in mind that the window to college is much shorter than the window to retirement, and your asset allocations should reflect this reality. 

Choosing the Right Plan

529 Plans

A 529 tax-advantaged savings account offers many benefits, making it a sound strategy for parents . The compounding effect is powerful, so start when your child is born, even if your budget only allows for small contributions.

529 Plan – Pros

  • Withdrawals spent on qualified higher education expenses, as well as secondary and vocational schools (up to $10K/year), are tax free

  • No contribution limits

  • Assets are transferable to other children in the family

  • Assets do not have to be reported on the Free Applications for Federal Student Aid (FAFSA), as it is regarded as a parental asset and not the dependent’s asset

  • There is no withdrawal penalty if a child earns a scholarship, attends a U.S. military academy, dies or is disabled

529 Plan – Cons

  • You must use it all on qualified educational expenses or you will incur a 10% penalty on any withdrawal and the money will be taxed at your current income tax rate

  • Investment options can be limited

  • Some 529 plans have high fees and feature a hidden fee structure

Traditional Brokerage Account (TBA)

TBA – Pros

  • Unlimited investment options and the funds can be spent on anything

  • There are no withdrawal penalties. Funds can be withdrawn at any time, for any reason

  • When you open the account and hire an investment manager it will be a transparent, basic fee structure

  • A good option for grandparents who want to contribute to college savings but are uncertain of the parents’ financial situation

TBA – Cons

  • Earnings are subject to capital gains taxes (re-allocating investments as your child ages can become costly).