How to save for college with crypto, without gambling away a child’s future
Nowadays, a surprising number of parents are planning to pay for college with crypto. Notably, 87% of parents who are saving for their kids’ college say they have invested in crypto, according to a recent poll of 1,250 parents from the online magazine Intelligent.com.
But is investing in crypto to pay for college a good idea? Certainly, there are caveats given its newness, volatility and unregulated status, according to investment professionals and crypto professionals.
Here are four considerations if you’re thinking of using crypto to help save for college.
1. Use crypto in moderation for college funding
Crypto is still an emerging asset and it’s subject to wild price swings. Notably, bitcoin has fallen a ton this year. Even with a recent rebound in bitcoin, the popular cryptocurrency has lost more than 70% of its value since its November all-time high of around $69,000.
This means families need to proceed with caution when using crypto for their college-finding needs. Some financial advisors caution against it entirely, while others provide a greenlight, to a certain degree.
“You don’t want to gamble your child’s ability to go to college on a speculative bet,” said Ric Edelman, a financial advisor and founder of the Digital Assets Council of Financial Professionals. Rather, he and other professionals contend that crypto should be part of a diversified portfolio, with an allocation of around 1% to 5%.
“You should have limited exposure. It should not the majority of your portfolio because of its volatility,” said Howard Greenberg, president of the American Blockchain and Cryptocurrency Association.
2. Understand your student’s time horizon
Parents have to be careful about their time horizon, said Ben Weiss, CEO and co-founder of bitcoin ATM network CoinFlip. If you’re sending a child to college next year, crypto is probably not a wise short-term investment, but if you have, say 10 years, crypto will probably grow a lot in that time frame. “The longer time horizon you have, the more aggressive you can be with crypto,” he said.
Some financial advisors, however, still advise parents not to count on crypto, especially since it is still unregulated and there’s a huge question over its inherent value. “The unproven nature of crypto as an asset class makes it a risky investment” to help pay for college, said Omar Qureshi, managing partner of Hightower Wealth Advisors in St. Louis. His advice: “Invest what you can afford to lose and don’t pin your hopes on paying for college by putting it in crypto.”
3. Consider crypto tax implications and 529 plans
Depending when you bought the crypto, you could owe a large tax liability, so you’ll need to factor that into your college-financing decisions. Say, for instance, you invested in bitcoin 10 years ago and have since made a huge gain. When you sell your holdings, you’ll have a large tax liability, Weiss said.
Because of the tax implications, families would be smart to invest in stock funds within a 529 college savings plan, which is tax-advantaged, and use crypto, if desired, to supplement their college-funding needs, Edelman said. Crypto would have to outperform the stock market by about 50% in order to be as profitable, net of tax, as you would obtain by investing in stocks within a 529 plan, Edelman said.
There are limited options for gaining exposure to crypto within a 529 account itself. A spokeswoman for the National Association of State Treasurers, an authority for state treasury programs, said the group isn’t aware of any 529s that have direct cryptocurrency investments as investment options. Some plans may offer investments that provide limited exposure to crypto or blockchain technology.
If you are looking for a tax-advantaged option to hold crypto to save for college, you might consider a self-directed Coverdell Education Savings Account. Just be aware of the low contribution limits and other restrictions associated with this type of account.
4. Know your coin and cryptocurrency exchange options
There are dozens of different ways you can invest in crypto, either directly or through options that include funds of funds, hedge funds and exchange-traded funds that invest in bitcoin mining, for instance. The Digital Assets Council of Financial Professionals has compiled a comprehensive list of investment options.
If you plan to own the crypto directly, be sure to pay attention to quality. Weiss said families should stick to bitcoin and the ethereum cryptocurrency, known as ether, since they are the largest in terms of market capitalization. Also purchase the coins from well-known exchanges such as Coinbase or Gemini, Greenberg said.