The golden rule
Your retirement first. Always.Kids can borrow for college (loans, scholarships, work, cheaper schools). You cannot borrow for retirement. Fund your 401(k)/IRA before a dollar goes to a 529 — a parent with no retirement savings becomes a far bigger burden on their kids than student loans ever were.
529 plans: the college savings workhorse
- Tax treatment: contributions are after-tax federally, but growth and withdrawals for qualified education expenses are completely tax-free. 30+ states also give a state tax deduction or credit.
- What counts: tuition, room & board, books, computers — plus up to $10,000/year for K–12 tuition and (since SECURE 2.0) up to $10,000 lifetime for student loan repayment.
- The escape hatch: unused 529 money (account open 15+ years) can roll into the beneficiary's Roth IRA — up to $35,000 lifetime. The "what if they don't go to college" fear is now mostly solved.
- Superfunding: front-load 5 years of annual gift-tax exclusions at once ($95,000 per person in 2026 at the $19,000 exclusion) — more years compounding.
- You don't have to use your state's plan — but check the state deduction first; it's often worth 5%+ instant return. Low-cost age-based portfolios are the default right choice.
Grandparent strategyGrandparent-owned 529s no longer hurt FAFSA aid (post-2024 simplification) — distributions from them aren't counted as student income. Grandparents can superfund without touching their $15M lifetime exemption (within annual exclusions).
Other education accounts
| Account | Key facts |
|---|---|
| Coverdell ESA | $2,000/yr limit, income phaseouts, must use by 30. Largely obsolete next to 529s — but allows K–12 expenses with more investment freedom. |
| UTMA/UGMA custodial | No contribution limit, but it's the child's money — they get full control at 18–25 (state-dependent). Counts heavily against FAFSA (20% of assets vs 5.64% for 529s). Use for non-college gifts, not core college savings. |
| Roth IRA (yours) | Contributions withdrawable anytime tax-free — a flexible backup college fund that doubles as retirement money if unused. |
FAFSA & financial aid, honestly
- File the FAFSA at StudentAid.gov — it's free, required for federal aid, and many colleges require it for their own scholarships. Opening: typically October 1 for the following fall.
- SAI (Student Aid Index) replaced the old EFC. Roughly: parent income counts most (~22–47% above allowances), parent assets ~5.64%, student assets 20%, student income 50% above ~$11k.
- What helps aid: maxing retirement accounts (not counted), paying down consumer debt, keeping cash in 529s (parent asset) vs the child's name.
- CSS Profile: ~200 private colleges use this deeper form — assume they see everything.
- Appeal: job loss, medical bills, divorce since filing? File a professional-judgment appeal with the aid office. It works more often than people think.
Tax credits for parents (2026)
- Child Tax Credit: up to $2,200 per child under 17 (OBBBA amount) — partially refundable. Phaseout starts at $200k single / $400k joint.
- Child & Dependent Care Credit: 20–35% of up to $3,000 (one child) / $6,000 (two+) in care costs so you can work.
- Dependent Care FSA: up to $5,000 pre-tax through your employer for childcare — often better than the credit if you're in the 22%+ bracket. Use-it-or-lose-it, so estimate carefully.
- American Opportunity Credit: up to $2,500/year for the first 4 years of college (100% of first $2,000 + 25% of next $2,000). Lifetime Learning Credit: up to $2,000/year after that. Coordinate with 529 withdrawals — don't double-dip the same expenses.
- Adoption credit: up to $17,670 for 2026 ($5,120 refundable).
Taming college costs
- Start at community college: two years at ~$4k/yr then transfer — same diploma, half the debt.
- Apply where you're exceptional: merit aid flows to students in the top 25% of a school's applicant pool, not to average students at reach schools.
- Negotiate: competing aid offers are leverage. A polite appeal letter citing a better package works.
- Run the net-price calculators on every college's website before applying — sticker price is fiction for most families.
- Cap borrowing: total student loans shouldn't exceed the student's expected first-year salary. Parent PLUS loans have no such guardrail — be ruthless with yourselves.
Teaching kids about money
- Ages 3–7: three jars — spend, save, share. Cash is concrete; apps are abstract.
- Ages 8–12: allowance tied to family contribution (not pay-per-chore — everyone's expected to help), plus paid extra jobs. Let them blow money on dumb stuff; small mistakes now prevent big ones later.
- Teens: a real bank account, a budget for their own expenses (clothes, fun), and compound-interest demos — $1,000 invested at 16 at 8% is ~$47,000 at 66. Open a custodial Roth IRA the moment they have earned income; it's the greatest gift in finance.
- Model it: kids copy what you do, not what you say. Talk about money openly — including mistakes.
FAQs
How much should I save for college per month?
For a newborn targeting ~$150k (public in-state, 18 years out): roughly $250–350/month in a 529 at 6–7% returns. Private college (~$350k+ future cost)? $600–800/month. Any amount beats zero — even $100/month from birth is ~$40k by 18.
What if my kid doesn't go to college?
Options: change the beneficiary to another family member (sibling, yourself), use it for trade school or grad school, take non-qualified withdrawals (earnings taxed + 10% penalty — contributions come out tax-free), or roll up to $35,000 into their Roth IRA. Flexibility is built in.
Will a 529 hurt financial aid?
Barely. Parent-owned 529s count as parent assets (~5.64% assessment). Qualified withdrawals don't count as income at all. It's the most aid-friendly way to save after retirement accounts.
Should grandparents open the 529 or parents?
Either works now that grandparent distributions don't hurt FAFSA. Many families have parents own it (control + state deduction) with grandparents contributing. Whoever owns it, keep the beneficiary flexible.