What’s the Best Type of Account to Save for College?

If you’re a parent, you likely feel the pressure of the cost of college tuition—even if your child is years away from attending college. The truth is that you’re right to feel that pressure, as the cost of four years of tuition for an in-state student can easily total more than $100,000.

This means that the sooner you start saving, the better the financial position you’ll be in when it’s time for your child to start their higher education. Even if your child is an infant or toddler, it’s not too early to begin saving money for college.

The good news is that there are plenty of very good options for saving the money you’ll need to cover these higher education expenses. But how do you know which type of account is the best for saving for college?

Do You Need to Save for Your Child’s College Education?

While there’s no way to know what your child’s plans will be and if they’ll attend college, it’s best to be prepared and save for the possibility. College tuition is expensive, so you want to have a plan for how to afford it.

Scholarships and grants are possibilities, but they’re not guaranteed. Of course, student loans are an option, and they might even be necessary, but the less debt your child needs to start their adult life with, the better.

This means that saving for college is essential, and that your child will thank you for it later. There are a number of different college saving strategies available, and you aren’t limited to using just one. Some of the best and most popular options include 529 plans, education savings accounts, custodial accounts, and even high-yield savings accounts.

529 Plans

Possibly the most effective college savings account is a 529 plan (named for Section 529 of the Internal Revenue Code). This is a type of investment account where the earnings are tax-deferred, and an eventual withdrawal is tax-free if the funds are used for a qualifying education expense, such as tuition, textbooks, school fees, or room-and-board. However, if the withdrawal is not made for qualifying education expenses, the withdrawal will be taxed, and a 10 percent penalty will also be applied.

In recent years, a number of improvements have been made to 529 plans. Most plans are no longer strictly limited to exclusively higher education expenses, as up to $10,000 per year can be withdrawn and used to pay for K–12 expenses. Plus, up to $10,000 can be used for student loan repayments, and up to $35,000 in unused funds can now be rolled over into a Roth IRA account, so your surplus education savings can jumpstart your child’s retirement savings.

As 529 college savings plans are administered by the states, they do differ from state to state. For example, some states provide tax advantages such as deductions or credits for contributions, while others do not.

Also, some states offer a type of 529 plan called a prepaid tuition account. These 529 accounts “lock in” tuition to the current rates at the time you open the account, which can result in big savings on college tuition down the road. They do, however, lack the flexibility of normal 529 college savings accounts in that they might lock your child into attending certain colleges, and they can’t be used for room-and-board or K–12 expenses, nor rolled over into a Roth IRA.

Education Savings Accounts / Coverdell Accounts

An education savings account (ESA), also known as a Coverdell account, is another strong option for higher education savings. Similar to 529 accounts, ESAs are a type of investment account. While the investments made with 529 accounts are determined by the state plan you’ve contributed to, ESAs allow you to self-manage your investments, similar to a brokerage account.

The funds in a Coverdell account can be used for elementary, secondary, and higher education expenses. Like 529 accounts, the earnings are tax-deferred, and withdrawals are tax-free if they’re used for qualifying education expenses.

However, ESAs have more restrictions compared to 529 accounts:

• Opening an ESA is limited to individuals with an adjusted gross income (AGI) of less than $110,000, while couples are limited to an AGI of $220,000.
• Contributions are limited to $2,000 per year.
• Once the beneficiary turns eighteen, no further contributions can be made to the account.
• The education savings account must be liquidated by the time the beneficiary turns eighteen years old. Unused funds can either be rolled over to a new ESA for a family member or withdrawn (but subject to tax).

Custodial Accounts

A custodial account is an investment account opened by a parent or guardian that transfers to the beneficiary once they come of age (varies by the state, but generally between eighteen and twenty-one years of age).

Custodial accounts don’t offer any tax benefits, but the money earned by the account can be spent on anything, even expenses not related to education. This means that custodial accounts provide the most freedom in what ultimately happens to the funds.

These accounts do have a limitation in that the maximum annual contribution is equivalent to the annual gift tax exclusion, which is $19,000 as of 2025. And of course, as custodial accounts don’t offer any tax benefits, a withdrawal will be taxed—even if it’s used for education expenses, including tuition.

High-Yield Savings Accounts

While a high-yield savings account shouldn’t be your first choice for college savings, it is worth considering as a supplemental saving strategy, especially if you’re able to max out your contributions to one of the investment account types described above.

A high-yield savings account works similarly to a normal savings account, except that the interest rate is much higher, allowing it to earn more money over time. However, while there’s very little risk in a high-yield savings account compared to investment accounts, the earning potential of investment accounts is much higher, making them more suitable for long-term financial goals like college tuition and higher education expenses.

The major benefit of a high-yield savings account, aside from being low risk and having no restrictions, is that it’s easy to access the funds quickly, making a high-yield savings account an ideal emergency fund for your future college student.

Get the Right Account for Your College Savings Needs

Sending a child off to college is a big expense for any family to bear, especially if you have multiple children.

Hancock Whitney can guide you toward a college savings solution that works for your family and its higher education needs. Contact us today to find out how we can help you put your money to work saving for your children’s college future.