August means back-to-school season, and for many families, that brings education costs to mind. Whether you have a newborn or a high schooler, planning ahead for education expenses can save you thousands and reduce financial stress. Here’s what you need to know about funding education efficiently.
Why Education Planning Matters
College costs continue to rise faster than inflation. A four-year degree at a private university can easily exceed $300,000. Even public universities now cost $100,000 or more for four years. The earlier you start planning, the more time your money has to grow.
529 Plans: The Cornerstone of Education Savings
529 college savings plans are the most powerful tool for education funding. Your contributions grow tax-free, and withdrawals for qualified education expenses are also tax-free at the federal level.
Many states offer tax deductions for contributions to their 529 plans. You can contribute substantial amounts—most states allow total contributions over $300,000 per beneficiary.
529 plans are flexible too. You can change beneficiaries to another family member if plans change. And since 2017, you can use up to $10,000 per year for K-12 tuition at private schools.
Other Education Funding Options
Coverdell Education Savings Accounts offer more investment flexibility but have much lower contribution limits ($2,000 per year). They work well as a supplement to a 529.
Custodial accounts (UGMA/UTMA) have no contribution limits or restrictions on use, but the money legally belongs to the child at age 18 or 21. All earnings are taxable.
Roth IRAs can serve double duty. You can withdraw your contributions (not earnings) anytime without penalty, including for education. This gives you flexibility if retirement needs take priority.
How Accounts Affect Financial Aid
Not all education savings are treated equally for financial aid purposes. Parent-owned 529 plans have minimal impact—only about 5.6% is counted as available assets. Student-owned accounts count at 20%.
Grandparent-owned 529 plans don’t count as assets on the FAFSA, but distributions count as student income, which can significantly reduce aid eligibility. Strategy matters here.
Tax Benefits for Education
The American Opportunity Tax Credit provides up to $2,500 per student for the first four years of college. The Lifetime Learning Credit offers up to $2,000 per tax return for any level of education.
You can also deduct up to $2,500 in student loan interest if you’re paying back education debt. These benefits have income limits, so they phase out at higher income levels.
Planning Strategies by Life Stage
New Parents: Even $100 per month can grow to over $30,000 in 18 years with reasonable investment returns. Start small if needed—the key is starting early.
Elementary School: This is the time to maximize contributions if possible. You still have over a decade of growth potential.
High School: Shift to more conservative investments to protect your savings. You’ll need this money soon, so reducing volatility becomes important.
College Years: Withdraw strategically to maximize aid eligibility and tax benefits. Coordinate 529 withdrawals with other education tax credits.
Grandparents and Family Gifting
Grandparents can “superfund” a 529 by contributing up to five years’ worth of gifts at once ($90,000 in 2025, or $180,000 for couples) without triggering gift tax consequences.
Another option: Pay tuition directly to the educational institution. Direct payments to schools don’t count as taxable gifts at all, regardless of amount.
Balancing Education and Retirement
Here’s an uncomfortable truth: You should prioritize retirement savings over education savings. Students can borrow for college through loans, scholarships, and work-study programs. You can’t borrow for retirement.
A balanced approach works best. Contribute enough to your retirement accounts first, then dedicate additional savings to education. This ensures you won’t become a financial burden on your children later.
Get Started Today
Education funding doesn’t have to be overwhelming. The key is starting with a clear strategy that fits your overall financial plan. See if we’re right for you to create a comprehensive education funding strategy that balances your goals and maximizes tax benefits. Whether you’re just starting out or playing catch-up, we can help you make the most of every dollar saved.
