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College Saving Vehicles for Middle-Income Earners












Get up, go to work, go home, eat dinner, rest, repeat. Sound familiar? It’s not surprising that many middle-income families don’t give a second thought to saving for college. They’re too busy trying to manage day-to-day life!

Unfortunately, that lack of forethought doesn’t do anything to help your future college student. And if you think you have n plenty of time to get to it “later,” rest assured, “later” comes all too quickly. Too many students are left taking out massive loans and later leaving college with not only degrees, but also mountains of debt.

That’s no way to get started in life. There are some simple investment strategies you can take advantage of now to ensure a bright future for your child.

Tax-free option: 529 plan

A 529 plan allows you to contribute post-tax dollars into a type of a savings account. The funds may be withdrawn only for purposes of covering qualified education expenses; otherwise, they’re assessed a fee.  


  • Investments grow tax-deferred
  • Funds are not taxed upon withdrawal as long as they’re used at an accredited college in the United States or abroad


  • Contributions to 529 plans are not deductible on your federal tax return


Tax-deferred option: Borrow from 401(k)

If your employer offers a 401(k) retirement plan, first of all — take advantage of it! Not only does establishing a 401(k) allow you to save toward retirement, but it also reduces your tax liability come tax time. You’re able to contribute before-tax dollars to a plan that invests the money in stocks, money market accounts, mutual funds and bonds and grows it over time.

The first thing to remember about 401(k)s is that they are intended for your retirement and should be your last resort for funding a college education. Whereas you cannot take out loans to fund your retirement, your child has access to multiple options for college funding, so put your retirement first.

However, there are ways to access your 401(k) dollars without incurring fees if you need to. Your plan may allow you to take out a loan against your 401(k) that you can pay back over five years.


  • Although the loan incurs interest, you pay the interest back into your account
  • Enables you to access the funds without penalty prior to age 59 ½


  • If you quit your job, you’re fired or you’re laid before paying off the loan, you’ll have to pay it off in full within 60 days. If you don’t, it will generally be considered a taxable distribution.
  • Loan interest is not tax-deductible in most cases
  • You make loan payments with after-tax dollars
  • You miss out on tax-deferred investment earnings that otherwise would have accrued in your account


Home-equity loan or line of credit

If you’ve got your cash tied up in your home, among other places, you can opt to take out a home-equity loan or a home-equity line of credit. A home-equity loan gives you cash upfront and a variable or fixed interest rate for a fixed period of time. A HELOC lets you draw on a line of credit when you choose, and then make payments on the amount used, usually with a variable interest rate.


  • Interest may be tax-deductible
  • Can provide fast access to funds, provided you have good credit


  • Your home is on the line, so if you can’t make payments, the lender could foreclose on the loan and you can lose your home
  • No accrual of interest, as with a 529 or other savings account


The bottom line and next steps

Combine college funding strategies to take advantage of tax savings while also accruing interest. By setting aside just $50 per month when your child is born, you’ll accrue $21,000 by the age 18, assuming a 7 percent interest rate. (See example at Example at http://www.collegesavings.org/whySaveForCollege.aspx)

Even if you need to borrow against your 401(k) or your home, having a mix of strategies will ensure a bright future for your child — and for you when you retire.


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