Whether you are raising young children or looking ahead as a
grandparent, the soaring cost of higher education may already be on the radar.
Even if it isn’t a daily concern, there’s no escaping the
reality that earning a four-year degree now requires a significant financial
commitment.
Depending on the university, many first-year students are
eligible for scholarships that help defray some costs.
Including government sources, over $100 billion in grant and
scholarship money is awarded annually, according to the Education Data Initiative, a team of researchers that
collects data about the U.S. education system.
- The
average scholarship award for public 2-year institutions is worth $4,100.
- On
average, first-time undergraduates who receive government grants and
scholarships at a 4-year college receive about $15,750 annually.
But even with aid, outlays are formidable.
There is, however, a bit of good news. Tuition inflation has
slowed in the 2020s. In fact, it has actually declined, falling at a 3-year
average annual rate of 1.90%, according to the Education Data Initiative.
While welcome, that ray of sunshine hardly seems noticeable
to students and parents when the college bill lands in the mail.
How bad has it become? The average annual cost of tuition at
a public college is 40 times what it was in 1963; after adjusting for inflation, tuition has increased
312%. It is up 37% since 2010.
If you attended a four-year university in the 1970s or
1980s, you are well aware that tuition inflation has far outstripped the
general rate of inflation.
So, who does the heavy lifting when it comes to paying for
college?
On average, assuming $30,000 per year, parents bear about
40% of the costs, while scholarships and grants cover about 25%. College
savings plans and student loans each account for approximately 11% of the total
funding mix.
Miscellaneous sources cover the remaining 13%.
An investment in your child’s future
First, let’s review the basics.
Early planning makes a difference. Can you start as soon as
your child or grandchild is born? If so, the power of compounding works in your
favor.
For example, if you save $250 per month for 18 years and
earn 6% annually, your savings will grow to about $97,000 when the child turns
18.
However, waiting until age 9 slashes the balance to just
under $35,000 by age 18.
Using the parameters in our example, doubling the period
almost triples the balance.
The lesson is simple: take advantage of the power of
compounded growth. But let me also stress that even if you didn’t start saving
shortly after your child or grandchild was born, that 9-year-old in our example
above has resources to help defray costs.
Bridging the divide
A dedicated college savings strategy can expand the
resources available to assist your child. Therefore, a critical part of the
planning process is to identify ways to bridge the gap.
Let’s review several college savings vehicles that can help
close that funding gap.
Before we jump in, we want to caution you that this is a
general overview.
We’d be happy to entertain specific questions and explore
how we might assist you in setting up a college savings plan.
With that said, let’s begin.
- 529
plans are tax-advantaged savings plans that are sponsored by
states, state agencies, or schools.
Anyone can contribute to a 529 plan.
There are prepaid tuition plans that allow you to buy units
or credits at participating colleges or universities for future tuition for the
account beneficiary.
You may also consider an education savings plan. This
enables you to open an investment account to save for the child’s qualified
higher education expenses, tuition and certain expenses for elementary or
secondary public, private, or religious schools, and certain other
education-related expenses.
One of the primary benefits is tax-free growth within the
account, and withdrawals for qualified education expenses are exempt from
federal income tax. You may also avoid state income taxes, depending on your
state’s rules.
Account owners may withdraw up to $20,000 annually per
beneficiary to pay for K–12 tuition and other qualified educational expenses.
The amount doubled this year due to the One Big Beautiful Bill Act, though adoption of the higher
limits varies per state.
In 2026, individuals can gift up to $19,000 (married couples
filing jointly up to $38,000) in a single 529 plan without those funds counting
against the lifetime gift tax exemption amount.
Individuals also have the option to “superfund” a
529 plan with up to 5 years’ worth of contributions (or $95,000) in a single
year—without triggering federal gift taxes.
Investment options are generally limited and typically shift
from aggressive to more conservative as the child nears 18.
Individual states sponsor 529 plans and have varying total
account maximums determined by a given state. Maximum amounts are quite large
and surpass $500,000 in some states.
529 funds may also be used for professional development and
continuing education as well as apprenticeship programs.
- Coverdell
Education Savings Accounts (ESAs). Like a 529 plan, an ESA allows
you to contribute funds into an investment account. And you will have a
wider selection of investment options in an ESA versus a 529 plan.
Like a 529 plan, earnings aren’t taxed, and tax-free
withdrawals apply to college expenses and elementary and secondary education
expenses, regardless of whether the school is public or private, secular, or
religious.
But annual contributions are limited to $2,000, and there
are income eligibility limits for contributors. The income
phase-out is $95,000 to $110,000 for a single taxpayer and $190,000 to $220,000
for a married couple filing jointly.
- The
UGMA/UTMA account. A child’s account is established by an adult
(custodian), is managed by the adult, and any deposit into the UGMA
account becomes an irrevocable gift to the child. It may impact financial
aid.
There are tax advantages, but not to the extent of a 529 or
ESA plan. There isn’t a contribution limit. Just be aware that the IRS will
require you to file tax Form 709 for an annual gift above $19,000 ($38,000 for
a married couple filing jointly).
Up to $1,350 in earnings from a custodial account in 2026
may be exempt from federal income tax. The next $1,350 of earnings
above the exempt amount may be taxed at the child’s tax rate, which is
generally lower than the parent’s tax rate. Earnings above $2,700 are taxed at
the parent’s rate.
You may also transfer existing stocks, ETFs, mutual funds,
or other securities from your account into a custodial account.
Depending on the state, the control of the account must be
turned over to the child between 18 and 25 years of age. At that point, the
money belongs to them. They are free to spend or save as they see fit.
- A
traditional savings account. You can open a brokerage account or
a traditional savings account in your name and contribute regularly.
It’s under your control, giving you complete flexibility in
how the funds are ultimately used. There are no tax advantages, but you may use
the funds in any way you see fit to help your child.
- A
Roth IRA is an option because contributions can be withdrawn at
any time without taxes or penalties. Earnings may be withdrawn
penalty-free for qualified higher education expenses. However, consider
the impact on retirement planning.
Saving for your child or grandchild’s education starts with
a clear plan and the right tools.
Strategies such as 529 college savings plans, tax-advantaged
investing, and consistent contributions over time can help you build meaningful
education funds by maximizing the growth potential.
As with any project, it’s critical to develop a plan, take
the first step, and maintain consistency.
If you’d like more information, would like to develop a
plan, or are ready to get started, we’d be happy to assist you.
