How will you pay for your child’s college? That question haunts many parents—especially those managing their own student loan debt. Rising tuition costs make college planning feel daunting, but starting early and understanding your options makes it manageable.
The simple answer: start saving as soon as possible. The more nuanced answer: first make sure your own financial foundation is solid.
Do This Before Saving for College Parents tend to want to open up a savings account for their child as soon as they arrive in the world. But there’s something else you should do first: make sure you have your own financial bases covered. That means:
- Having an emergency fund. Ideally, you want to save 3 to 6 months’ worth of income in cash to help you cover unexpected costs. With children comes more financial responsibility, so it might be smart to err on the side of caution and aim to save on the bigger end of that spectrum.
- Contributing 10% to your retirement savings. This is a minimum amount. Ideally, you should save 15% to 20% of your income for retirement. Take advantage of employer-sponsored plans with a match first if you have access to them, and then save in tax-advantaged accounts.
- Paying off personal and consumer debts. Aim to pay off high-interest rate debt first (like credit card balances). If you can pay off your student loans, do so -- but at the very least, have a repayment plan in place and make sure the monthly payments on the loans are manageable.
Taking care of your financial needs first isn’t selfish. It prevents becoming a financial burden on your children later. Multiple options exist to help kids pay for college—parents don’t need to fund 100% alone. Securing your own retirement is far more important since “retirement loans” don’t exist like student loans do.
How to Start Saving for College
Once your foundation is solid, focus on college savings. The earlier you start, the better—not just because of time and compound growth, but because you can invest rather than sit on cash.
Special college savings accounts impact your child’s future financial aid eligibility. Assets in your child’s name are weighted more heavily than parental assets in FAFSA calculations. Keeping college savings in the right account type matters.
Use the Federal Student Aid Estimator to see how different asset types affect your child’s aid eligibility.
The Pros and Cons of 529 Plans 529 plans are some of the best known and most popular college savings vehicles. Plans are operated by individual states or institutions. These can can help you keep more money in your pocket (to use for savings) because they offer a number of tax advantages. You can deduct contributions and you don’t need to pay tax on the earnings in the account. Other advantages of 529 plans include:
- Allowing you to invest what you save for college, so that money benefits from potentially earning returns and enjoying compound interest growth.
- Being specifically for college savings, making it more likely that families will maintain the account for college costs (since there are penalties for withdrawing the money and using it for other purposes beyond qualified expenses for higher education).
- Providing a way to invest money with low minimum deposit requirements to open an account and start saving. Traditional brokerage accounts require users have $1000, $3000, or even more to open and use. There are 529 plans with minimums as low as $15.
There are some downsides to be aware of, too, before opening a 529 plan:
- Many 529 plans come with high fees, which can eat into your earnings over time.
- You’re limited to where you can invest. 529 plans offer access to certain funds, but not all -- you may not be able to invest your money exactly where you want like you could with a regular brokerage account.
- If you don’t use the funds in a 529 plan for education expenses, you could face pretty hefty fees. These can include charges of up to 10% -- and both your state and the federal government may impose penalties.
Before choosing a 529 plan, consider working with a fee-only fiduciary financial advisor who can evaluate your specific situation. You have many options, and the right plan depends on multiple variables.
Savings Alternatives to 529 Plans 529 plans are great options. But they aren’t the only ones you have. Other alternatives may work better for you, depending on your financial situation. If you decide a 529 plan isn’t for you -- or you just want to compare it to your other options -- you can look at one of the following plans to help you save for college: ### Prepaid Tuition Plans
A prepaid tuition plan locks in today’s tuition rates for future use. If your child will attend an in-state university, this can protect against rising costs.
The trade-off: these plans are state-sponsored, so you rely on the state’s promise. Some have formal guarantees; others don’t. That’s a different risk than stock market volatility. If your child attends out-of-state, you keep your credits but they lose value.
UGMAs and UTMAs
UGMA stands for “Uniform Gift to Minors Act,” UTMA for “Uniform Transfer to Minors Act.” These accounts let you save for your child’s future—college or otherwise. The funds must benefit the minor.
Advantage: if your child decides not to attend college, they have a nest egg to start adult life. Disadvantage: at 18, control passes to your child. Not all teenagers make wise long-term financial decisions.
IRAs or Taxable Brokerage Accounts
You can use a Roth IRA in your own name if you’ll be at least 59½ before college expenses hit. You withdraw penalty-free while investing as you choose.
A regular taxable brokerage account offers maximum flexibility with no tax breaks on gains. You pay taxes on earnings but have complete control over when and how money is used.
Making the Right Choice for Your Family
You have many options—which is great because you can build a strategy that fits your situation. But that abundance of choices can also feel overwhelming.
You don’t have to navigate this alone. A good financial planner helps you understand your options and chart the best path forward given your goals, values, and overall financial picture.
Start a conversation with us to discuss which college savings strategy makes sense for your family.
