How to save for college with crypto, without wasting your future

Nowadays, a surprising number of parents are planning to pay for college with crypto. Notably, 87% of parents saving for their kids’ college say they’ve invested in crypto, according to a recent poll of 1,250 parents by online magazine Intelligent.com.

But is investing in crypto to pay for college a good idea? There are certainly caveats given its newness, volatility and unregulated status, according to investment experts and crypto professionals.

Here are four considerations if you’re thinking about using crypto to save money for college.

1. Use crypto in moderation for college funding

Crypto is still a growing asset, and it is subject to wild price swings. In particular, 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 must proceed with caution when using crypto for their college-finding needs. Some financial advisors warn against it altogether, while others give the green light, to a certain extent.

“You don’t want to bet your kid’s ability to go to college on a speculative bet,” said Ric Edelman, a financial adviser and founder of the Digital Assets Council of Financial Professionals. Rather, he and other professionals argue that crypto should be part of a diversified portfolio, with an allocation of around 1% to 5%.

“You should have limited exposure. It shouldn’t be the majority of your portfolio because of the volatility,” said Howard Greenberg, president of the American Blockchain and Cryptocurrency Association.

2. Understand the student’s time horizon

Parents need to be careful with their time horizon, said Ben Weiss, co-founder of bitcoin ATM network CoinFlip. If you’re sending a kid off to college next year, crypto probably isn’t a wise short-term investment, but if you have, say, 10 years, crypto is likely to grow a lot in that time frame. “The longer your time horizon, the more aggressive you can be with crypto,” he said.

However, some financial advisors still advise parents not to trust crypto, especially since it is still unregulated and there is a big question mark about its intrinsic 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 put your hopes of paying for college in crypto.”

3. Consider crypto tax implications and 529 plans

Depending on when you bought the crypto, you may owe a large tax liability, so you need to factor that into your college funding decisions. For example, let’s say you invested in bitcoin 10 years ago and have since made a huge profit. When you sell your inventory, you’ll have a big tax liability, Weiss said.

Because of the tax implications, families would be smart to invest in mutual 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% to be as profitable, net of taxes, as you would get investing in stocks inside a 529 plan, Edelman said.

There are limited opportunities to gain exposure to crypto within a 529 account itself. A spokeswoman for the National Association of State Treasurers, an authority on state treasury programs, said the group is not 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’re looking for a tax-advantaged option to hold crypto to save for college, consider a self-directed Coverdell Education Savings Account. Just be aware of the low contribution limits and other limitations 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 alternatives that include funds of funds, hedge funds, and exchange-traded funds that invest in bitcoin mining, for example. The Digital Assets Council of Financial Professionals has compiled a comprehensive list of investment options.

If you plan to own the crypto outright, be sure to pay attention to its 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 buy the coins from well-known exchanges like Coinbase or Gemini, Greenberg said.

SIGN UP: Money 101 is an 8-week financial freedom learning course delivered weekly to your inbox. For the Spanish version of Dinero 101, click here.

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.