💰 The Cost of College (2025)
$100k
Public In-State(4 years total)
$200k
Public Out-of-State(4 years total)
$300k
Private University(4 years total)
And costs are rising 5-6% annually, doubling approximately every 12-15 years. A child born today will face even higher costs in 18 years.
⚠️ Critical Principle: Retirement Before College
Never sacrifice your retirement savings to fund your children's education. Your kids can borrow for college, get scholarships, work part-time, attend community college first, or choose less expensive schools. You cannot borrow for retirement. The best gift you can give your children is parents who won't be a financial burden in old age.
📊 Account Type Comparison
| Feature | 529 Plan | Coverdell ESA | UTMA/UGMA | Prepaid Tuition |
|---|---|---|---|---|
| 2025 Contribution Limit | $18,000/year (gift tax limit) Lifetime limits vary by state (typically $300k-500k) |
$2,000/year per beneficiary | Unlimited (but $18,000+ triggers gift tax) | Varies by plan |
| Income Restrictions | None | Phase out: $95k-110k (single), $190k-220k (married) | None | None |
| Tax Treatment | Tax-free growth and withdrawals for qualified expenses | Tax-free growth and withdrawals for qualified expenses | Taxable annually (at child's rate up to ~$2,500) | Tax-deferred growth, tax-free if used for tuition |
| Control | Parent retains control forever | Parent retains control until beneficiary is 18 (or 30 for special needs) | Child gains control at 18-21 | Parent retains control |
| Qualified Expenses | K-12 tuition ($10k/year), college, trade school, apprenticeships, student loans (up to $10k) | K-12 expenses (tuition, books, supplies), college | Any purpose (no restrictions) | Tuition and mandatory fees only |
| Investment Options | Age-based or static portfolios (limited choices) | Any investment (stocks, bonds, funds) | Any investment | None (prepaid credits) |
| Change Beneficiary? | Yes, to another family member | Yes, to another family member | No, irrevocable gift to child | Limited transferability |
| Financial Aid Impact | Parent asset (5.64% assessment) | Parent asset (5.64% assessment) | Child asset (20% assessment) - terrible for aid | Parent asset (5.64% assessment) |
| State Tax Benefits | Many states offer deductions/credits | None | None | Varies by state |
| Penalties for Non-Education Use | Earnings taxed + 10% penalty (can roll to Roth IRA to avoid!) | Earnings taxed + 10% penalty | None (but child controls at 18-21) | Variable refund policies |
📚 Detailed Account Breakdowns
529 Plans (Best for Most Families)
State-sponsored investment accounts offering tax-free growth for education expenses. Each state offers its own plan, but you can use any state's plan regardless of where you live.
✅ Pros
- Tax-free growth - no federal taxes on earnings if used for education
- High contribution limits ($18k/year, $300k-500k lifetime)
- State tax deductions in many states ($300-500+ annual savings)
- Parent retains control - child can't blow it on a car
- Can change beneficiary to siblings/relatives
- NEW: Roll unused funds to Roth IRA (SECURE Act 2.0)
- Covers K-12 tuition ($10k/year), college, trade schools, apprenticeships
❌ Cons
- Limited investment choices (can't pick individual stocks)
- 10% penalty + taxes on non-qualified withdrawals (unless rolling to Roth)
- Investment options vary by state plan quality
- May have age restrictions on beneficiary changes
Coverdell ESA (Education Savings Account)
Tax-advantaged account similar to 529 but with lower limits and more restrictions. Can cover K-12 and college expenses.
✅ Pros
- Tax-free growth for education expenses
- Complete investment freedom (any stock, bond, fund)
- Covers K-12 expenses beyond just tuition (computers, supplies, etc.)
- Parent retains control
- Lower financial aid impact (parent asset)
❌ Cons
- Only $2,000/year contribution limit - far too low for most families
- Income phase-outs exclude higher earners
- Beneficiary must use funds by age 30 (or transfer/face penalties)
- More complex than 529s
- No state tax benefits
UTMA/UGMA (Custodial Accounts)
Assets held in child's name but managed by custodian until child reaches adulthood (18-21, depending on state).
✅ Pros
- Unlimited contributions
- Complete investment flexibility
- Can be used for any purpose (education, car, starting business)
- No income restrictions
- Earnings taxed at child's lower rate (up to ~$2,500)
❌ Cons
- Child gains full control at 18-21 (can spend on anything!)
- Cannot change beneficiary
- Terrible for financial aid (20% assessment rate)
- Earnings are taxable (though at child's rate)
- Kiddie tax applies to unearned income over ~$2,500
Prepaid Tuition Plans
Lock in today's tuition rates for future use. Most states guarantee your investment keeps pace with tuition inflation.
✅ Pros
- Locks in current tuition rates
- Protection from tuition inflation
- State-backed guarantees
- No investment risk
❌ Cons
- Usually only covers tuition and mandatory fees (not room & board)
- Limited to in-state schools (or face value loss if transferring)
- May not keep up if child goes out-of-state or private
- Less flexibility than 529 savings plans
🎯 Which Account Should You Choose?
✅ For 95% of Families: 529 Plan
The 529 plan is the best choice for most families because it offers:
- High contribution limits and tax-free growth
- Parent retains control (child can't blow it on something else)
- State tax benefits in many states
- NEW: Can roll unused funds to Roth IRA (SECURE Act 2.0)
- Flexibility to change beneficiaries
- Lower financial aid impact than UTMA/UGMA
Start with your state's 529 plan to get state tax deductions. If your state doesn't offer benefits, consider high-performing plans like Utah's my529, Nevada's Vanguard 529, or New York's 529.
💡 Grandparent Strategy
Grandparents should open 529s in their own name (not parent's). Why? Parent-owned 529s count as parent assets (5.64% impact on aid). Grandparent-owned 529s don't appear on FAFSA at all until withdrawn, and by waiting until junior/senior year, there's no future FAFSA to impact!
💡 College Savings Tips & Strategies
1. Start Early
$200/month from birth to 18 at 7% return = $89,000. Same amount starting at age 10 = only $38,000. Time is your biggest asset.
2. Automate Contributions
Set up automatic monthly transfers. Even $50-100/month adds up significantly over 18 years.
3. Use Windfalls
Birthday/holiday gifts, tax refunds, bonuses - direct to 529 instead of buying more toys.
4. Don't Over-Save
Better to save 50-75% of projected costs and have child contribute through work, scholarships, and loans than sacrifice your retirement.
5. Consider Community College
2 years at community college + 2 years at university saves $50k+ and results in same degree.
6. Focus on ROI
Engineering degree from state school > Philosophy degree from private school. Consider earnings potential vs. cost.
7. Age-Based Portfolios
Use age-based 529 portfolios that automatically shift from stocks to bonds as college approaches.
8. Multiple Children?
Open separate 529s for each child for tracking, but you can transfer funds between siblings if needed.
9. State Tax Benefits
Many states offer $300-500+ in annual tax savings for 529 contributions. Free money!
10. Teach Financial Responsibility
Have your teen contribute to college costs through work. Skin in the game = better grades and appreciation.
🎓 Key Takeaways
- 529 Plans are best for 95% of families - tax-free growth, parent control, high limits
- NEW: Unused 529 funds can roll to Roth IRA (game changer!)
- NEVER sacrifice retirement savings for college - kids can borrow, you can't
- Start early - even $100/month grows significantly over 18 years
- Community college first 2 years saves $50k+ with same degree
- Consider degree ROI - not all degrees provide good financial returns
- Grandparents: Open 529s in your name for better financial aid strategy
- Don't over-save - aim for 50-75% of costs, not 100%