Adding Optionality to Your College Savings Plan

Graduation season has come and gone. With it, 3.7 million high school seniors walked across stages, waved at loved ones, and threw pointy caps into the air. Many of those graduates will now head off to college and take part in new adventures. And while college can be an exciting time for students, it can be a stressful one for parents (and grandparents) for a variety of reasons, paying for college chief among them.

For a baby born today, the average projected cost of her in-state, four-year college education will be over $280,000, with private college pegged at $580,000.¹

Knowing the cost of your child (or grandchild’s) education can be a useful starting point but knowing how much you need to save is quite another, and unfortunately there’s not a one-size-fits-all answer to this question.

What we do know from our work advising families is that when it comes to education savings, it’s important to have a plan in place that preserves options given wide-ranging costs and outcomes for your child.


For many families, 529 plans can make a lot of sense. 529s are state-sponsored savings plans that offer tax-free growth so long as funds in the account are used for qualified expenses such as tuition and room and board. Many states (see figure 1) even offer some form of tax incentive for contributing to 529s. Depending on their state of residence, parents and grandparents can contribute to the same 529 for a child or establish separate plans to take advantage of those benefits.


Figure 01. State tax benefits associated with.529 Plans. Arkansas also offers a state income tax deduction for contributions to 529 plans from other states; however, this deduction is less than the deduction for contributions made to Arkansas-based 529 plans. Consult the Arkansas plan for plan-specific information. Source: JPMorgan. Data as of November 2020


529s do carry some risks: funds that aren’t used for qualifying expenses are assessed a 10% penalty and taxed at the account owner’s marginal tax rate, which could be as high as 39.6% under President Biden’s proposed tax plan. And while the penalty can be waived in the case of scholarships for a year, taxes are still owed if funds are withdrawn for any reason other than a qualifying expense.

This creates a balancing act for savers: put too little in a 529, and you have potentially left unused tax benefits on the table.

Put too much in a 529, and you may have trapped excess funds inside a savings vehicle that can’t be re-purposed without penalty and taxes.

With costs varying widely between public, in-state, and private institutions and considering the possibility of scholarships, you may not want to put all your eggs in the 529 basket. One approach is to intentionally underfund a 529 and fund the remainder using vehicles such as a taxable account or irrevocable trust that preserves optionality for other needs that may arise for both the account owner and the beneficiary. Let’s consider how Jack’s parents and grandparents can fund his college expenses utilizing a 529 and a mixture of other accounts.

Jack’s parents would like to be able to send him to four years at a private college of his choosing which is expected to cost $500,000 in 18 years.

  • To do this, Jack’s parents could set a goal of having $250,000 (50%) in a 529 by the time he turns 18. They could set aside the additional $250,000 in a taxable account in their own name.
  • Jack’s grandparents, who are concerned about getting funds out of their estate immediately, could establish an irrevocable trust for the benefit of Jack. If they decide fund the trust with $10,000 per year over the next 10 years, they could remove $100,000 from their estate, protect the assets from creditors, and potentially prevent Jack from receiving the funds outright at a young age and buying a Camaro with his college savings. While the costs to set this up may be prohibitive for one grandchild, it may make sense as part of a larger goal to fund a portion of each grandchild’s education (i.e., for 10 grandchildren).

Fast forward 18 years. Jack has decided to pursue engineering at an in-state, public school. The cost is $250,000.

  • Jack has 100% of his education needs met by the 529.
  • Jack’s parents can repurpose the money they saved in the taxable brokerage account for their own retirement without penalty.
  • The funds in Jack’s trust account set up by his grandparents can now be used for expenses that aren’t covered by a 529, such as a car on campus, living expenses incurred during a summer internship, and, if the terms of the trust allow it, a portion may be used towards a down payment on a house.

In lieu of a trust, if Jack decides to attend a private school, his grandparents could make a $250,000 payment to the school directly to go towards tuition. There are no annual gift tax exclusions associated with direct payments to a school, and this avoids the Camaro problem by ensuring the funds go directly to the institution instead of Jack’s pocket.

It is also important to note that the sequence of funding is critical. Because the 529 offers tax free growth, filling this bucket first can mean the difference in an entire year’s worth of college expenses, compared with saving the same amount in a taxable account.[1] Using the above example, if Jack’s parents didn’t have the means to start an education savings plan immediately, Jack’s grandparents or other relatives may want to start with a 529 in lieu of an irrevocable trust. Some wealthy families may consider overfunding a 529 plan as part of their overall estate planning strategy. Any unused portion can then be used by Jack’s (unborn) children for their own educational needs.

With wide-ranging costs, the possibility of scholarships, and changing circumstances, having optionality for education savings is becoming increasingly important. Start by knowing the costs, considering your goals, and discuss the means to fund those goals with your family. For additional information on what might make sense for your situation, contact your Balentine Relationship Manager or visit or


¹, assumes 5% inflation rate using current averages.

²JPMorgan College Planning Essentials 2021. Assumes 6% return in a tax-free 529 plan vs. a 3.8% return in a taxable account for an investor in the 37% tax bracket; $10,000 initial investment and monthly investments of $500 for 18 years. Hypothetical for illustration purposes only.

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