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Planning for your child's college education can feel overwhelming, but it's never too early to start. With tuition costs continuing to rise, having a strategic financial plan is essential. The right investment strategy can help you save more efficiently while taking advantage of financial tools that provide tax benefits. Here's what to consider as you invest for your child's education in 2025.
1. Start Early – Time is Your Best Asset
Starting your savings as early as possible gives you a longer time horizon, allowing your investments to grow and benefit from compounding interest. The earlier you start, the more potential you have to utilize higher-yield options, whether through traditional savings accounts or tax-advantaged investment accounts for education.
Given the current landscape, where the average cost of college ranges from $10,000 to $40,000 per year, saving aggressively is more important than ever. Early college savings strategies ensure you’re not left scrambling to cover costs as college approaches.
2. Explore 529 Plans – Tax and Investment Advantages
A 529 plan remains one of the best tax-advantaged vehicles for college savings. This special type of investment account not only allows your contributions to grow tax-free but also enables tax-free withdrawals when used for qualified education expenses.
529 plans also offer tax-free withdrawals of up to $10,000 annually for K-12 tuition and a lifetime limit of $10,000 for student loan repayments. As of 2025, contributors can give up to $19,000 per year ($38,000 for married couples giving jointly) per beneficiary without incurring gift tax penalties.
Celebrate National 529 Day!
Each year, May 29th (5/29) is recognized as National 529 Day, a day to promote the importance of education savings. To learn more about how 529 plans make college more affordable and why they’re celebrated on this day, check out our blog post: National 529 Day: How A 529 Plan Makes College Affordable. Families can use this day to review their contributions, adjust their savings plans, and even start a new 529 account.
Financial Aid Implications
529 plans owned by parents are treated as parental assets in financial aid calculations, assessed at a maximum rate of 5.64%. This is significantly lower than the rate applied to student assets (up to 20%), making 529 plans a more financial aid-friendly option for education savings.
Tip From a CFP® Professional
One strategy that some families consider is having a grandparent or another family member own the 529 plan. When structured properly, this can reduce the plan’s impact on financial aid eligibility, as it won’t be included as a parent or student asset on the FAFSA. However, withdrawals may be considered student income in some cases, which is why working with a financial advisor is crucial to ensure the strategy aligns with your overall financial aid plan.
3. Consider Coverdell ESAs for Educational Savings
While 529 plans are popular, Coverdell ESAs (Education Savings Accounts) are another tax-advantaged option worth exploring. These accounts allow funds to grow tax-free, with withdrawals also tax-free when used for qualified education expenses.
Coverdell ESAs are especially useful for K-12 education savings, including tuition, books, supplies, and even technology needed for school. This makes them a great option for families planning ahead for private school tuition or other costs associated with elementary and secondary education.
If funds aren't used by the beneficiary before age 30, the account can be rolled over to another family member or even converted to a 529 plan, adding flexibility.
Financial Aid Implications
Like 529 plans, Coverdell ESAs owned by parents are treated as parental assets in financial aid calculations. These accounts are assessed at a maximum rate of 5.64%, ensuring a minimal impact on financial aid eligibility compared to custodial accounts.
Tip From a CFP® Professional
For families concerned about financial aid, having another family member, such as a grandparent, own the Coverdell ESA may be a strategic option. This can potentially reduce its impact on financial aid calculations. However, there are caveats—such as how distributions are treated as student income—which makes consulting a financial advisor critical for proper implementation.
4. Get Your Child Involved: Custodial Accounts Teach Financial Responsibility
Consider setting up a custodial account under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) to involve your child in their college savings. These accounts allow minors to hold and invest money, offering them a hands-on learning experience in financial responsibility.
Money gifted to them by family members or earned through part-time jobs can be deposited into these accounts. Engaging your child in the process teaches valuable financial literacy skills for the future.
Financial Aid Implications
Keep in mind that custodial accounts, including UTMAs, are considered the student’s asset for financial aid purposes. This means they are assessed at a higher rate (up to 20%) when determining the Expected Family Contribution (EFC), which can reduce eligibility for need-based aid. If financial aid is a significant part of your plan, consider balancing UTMA savings with other options like 529 plans or Coverdell ESAs, which are treated as parental assets (assessed at a lower rate).
5. Adapt Your Investment Strategy Over Time
Just like retirement planning, your investment approach should evolve as your child approaches college age. While you may initially focus on growth-oriented investments, such as stocks and mutual funds, it’s important to gradually shift towards more conservative investments like bonds or cash as the college years get closer. This helps preserve the value of what you've built and ensures funds are readily available when tuition payments start. Regularly reviewing and reallocating your investments can safeguard your savings while allowing for continued growth.
6. Leverage Tuition Payments and Other Creative Funding Solutions
If you started saving later than planned or need additional help covering costs, don't panic. You can still take advantage of creative solutions. For instance, anyone—whether it's a grandparent, relative, or friend—can make direct payments toward tuition without incurring a gift tax penalty. This is particularly useful if you have generous benefactors who want to contribute but don’t want to be limited by the annual gift tax exclusion.
Additionally, encourage your child to explore a variety of college options rather than focusing on just one school or specialization. Sometimes, looking beyond traditional choices can open doors to affordable alternatives that still meet their goals. For instance, many students have found success by pursuing degrees in less conventional schools that align with their career interests while remaining budget-friendly.
Your Takeaways
Saving for college is like any other financial goal—consistent savings and a well-thought-out plan are key. Your financial advisor can guide you through the right investment options and strategies to ensure that you and your child are prepared for the costs of higher education.
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