Higher education costs keep rising across the United States with average inflation of roughly 6 percent and some students will have to rely on support from their parents to cover the soaring costs, but setting aside funds into an education savings account might not be the best move.

Instead, many parents are looking to alternative approaches through which they can still support their children financially without immediately tying up their money in a long-term savings account. There are other smart ways to invest funds that can have more flexibility than a conventional education savings account, though the best fit for someone will be case-by-case.

Parents are thinking creatively about how to invest in their children’s future at a time when tuition costs continue to spike, with Northwest Missouri State University recently announcing that it plans on hiking baseline tuition expenses by 4 percent for the coming academic year.

That figure is just two points shy of the average 6.27 percent increase in average U.S. college tuition costs in 2022, and the trendline shows no signs of declining in the near future.

The rapidly rising costs can be concerning not just for students who become stressed about whether they’ll be able to afford higher education, but also for their parents who are nervous about locking away funds if they’re not sure their child will ultimately go to college.

Indeed, enterprising youngsters are ramping up their consideration of alternatives to studying at a U.S. university, such as launching their own business, going to a cheaper college overseas, or even getting the skillset they need through online courses. It’s understandable that parents are trying to find investment choices where they could still get back all or a significant portion of their funds in the event their child decides to skip college.

There are three main types of education accounts available:

• 529 accounts: These are tax-exempt funds if they are used to cover college costs, and can also be spent on other types of education such as schooling at home. Family and friends can donate gift investments to these accounts. But if a child doesn’t use the funds, parents will have to pay a penalty of 10% for any money withdrawn that’s not used for college fees
• Coverdell education savings accounts: Similar to a 529 account, parents pay into these to cover college costs such as education, but there are some important limitations. For example, it’s only possible to invest up to $2,000 in a single year in these accounts. And people who earn more than $110,000 annually on a tax return, or $220,000 when filing a joint return, aren’t even allowed to create one of these accounts, limiting their use
• Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts: These offer tax benefits, including no tax on the initial $1,100 invested, and can be ideal for those parents who want to support their child financially even if there are doubts about if the child will go to college. There’s no prohibition on how the funds can be used, so there’s a risk that some children might just use all the money on luxuries.

Alternatively, some students take out loans to cover their tuition costs, although there are countless news stories about how people end up having to pay these debts off for decades, and often end up struggling to even meet their monthly repayment schedules. And many parents won’t like the idea of their child beginning adult life with such a massive debt.

Life is unpredictable, and while a 529 account may seem perfect for a child currently set on going to college, the parents could take a tax hit if the child ends up opting against higher education and they want to take back those funds. UGMA and UTMA funds can be good if there’s a solid chance a child will definitely not go to college, but parents need to have certainty that their offspring plans on using the money wisely and won’t spend it frivolously.

Every family’s situation is unique, so the wisest decision that supportive parents can make is to have an honest chat with their children about their future plans and find the account that is the best match both for their needs and for how the parents use their significant investment. Sometimes taking a potential tax hit and not locking up your funds may be the right answer for you.

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