Smart Steps for College Financial Planning

3/1/2025

While the cost of college has steadily risen over recent decades, its value remains a priority for many parents and students. However, the high and ever-increasing expense of higher education can feel overwhelming, making it difficult for families to establish a clear savings plan. In fact, many parents cite inflation and rising tuition costs as their top concerns when planning for college expenses. So, how do parents go about planning financially for their child’s future education when there are so many concerns?

The 529 College Savings Account

A 529 plan is a savings account designed specifically for education expenses, offering significant tax advantages. These accounts grow tax-deferred, and withdrawals are tax-free if the funds are used for qualified education costs. Contributions can come from anyone, and the account grows over time through investments.

One notable feature of 529 plans is their flexibility regarding beneficiaries. There’s no age requirement, allowing parents to open a plan at any time. Individuals who aren’t yet parents, but plan to have children can open a 529 plan in their own name and later designate their child as the beneficiary.

Additionally, you’re not limited to your state’s 529 plan- you can invest in any state’s plan. However, many families choose their home state’s plan because 34 states currently offer state income tax deductions or credits for contributions.

There are two types of 529 accounts, each with unique features:

• Individual accounts: These can be opened by a parent or grandparent with a child named as the beneficiary. Anyone can contribute to a parent owned 529 plan. Families may even request contributions in lieu of birthday gifts for their child, involving extended family in saving for a child’s education. Typically, one parent is the account owner.
• Custodial 529 accounts: These plans have the child as both the account owner and the beneficiary. Since the child is a minor, a custodian will manage the account on behalf of the child until the child reaches a certain age. A custodial account is less flexible because the beneficiary cannot be changed. This can complicate matters if a child doesn’t attend college or has other educational fees that qualify.

Understanding the benefits and limitations of these 529 plans can help families choose the options that best suit their education savings goals. Whether you’re saving for a newborn or planning for the future, a 529 plan can be a powerful tool for securing their educational future.

Read More: How to Start a 529 College Savings Account

What is FAFSA?

Even if you have a 529 plan for your child or grandchild, it’s essential to apply for the Free Application for Federal Student Aid (FAFSA). FAFSA is the key to accessing all forms of federal student aid including grants (such as the Pell Grant), federal student loans, and work-study programs. Additionally, many states and colleges use FAFSA information to determine their own financial aid awards.

A common misconception is that families with higher incomes won’t qualify for aid, leading some to skip the application altogether. However, you won’t know what you’re eligible for until you apply. Since the FAFSA is free to complete, there’s no downside to submitting it.

FAFSA Updates and Changes

For the 2024-2025 award year, FAFSA underwent a significant overhaul, which led to delays and challenges for families and financial aid administrators. To avoid similar issues for the 2025-2026 FAFSA, the U.S. Department of Education launched a testing period, allowing some students to fill out the form before its official release. Historically, FAFSA opens each year on October 1^st, though release dates may vary due to these recent changes.

To successfully submit FAFSA, families should have the following documents ready:

• Social Security numbers (for both students and parents)
• Driver’s license number or state ID
• Tax information (including W-2s and federal income tax returns)
• Records of untaxed income (such as child support or disability benefits)
• Current bank statements and net worth of investments, business, or farms (if applicable)
• A list of schools the student is interested in attending

Students must meet specific eligibility requirements to qualify for federal financial aid. Generally, they must:

• Be a U.S. citizen, national, or legal permanent resident, or hold an Arrival-Departure Record (I-94) from U.S. Citizenship and Immigration Services with an eligible status.
• Be enrolled in a Title IV- eligible school, meaning an institution authorized to receive federal aid funds.

By completing the FAFSA application, students and families can maximize their financial aid opportunities and reduce the burden of paying for college.

Student loans

Once you’ve applied for FAFSA and factored in your 529 plan, you may need to consider student loans to cover any remaining college expenses. Student loans help bridge financial gaps, ensuring students have the funds needed for tuition, housing, and other education costs. However, student loans must be repaid even if the student doesn’t graduate from college, or passes away - so it’s crucial to understand your options before borrowing.

Read More: Taking Control of Your Student Loans

There are two main types of lenders who offer student loans for college students. The U.S. Department of Education, and private student loan providers including banks, credit unions, and state loan agencies. Federal loan eligibility is determined by filling out the FAFSA application. There are four types of federal student loans for college: direct subsidized loan, direct unsubsidized loan, federal direct PLUS loan, and federal direct consolidation loan. You can learn more about these loans here.

Private student loans come from a private lender. These loans can come with fixed interest rates and often require the student borrower to have a cosigner. Private student loan interest isn’t subsidized, so as soon as you borrow money, the loan will begin accruing interest like unsubsidized federal loans. They have higher interest rates than several types of federal loans, but borrowers with good credit or a credit-worthy cosigner may find private loans with lower interest rates. Private student lenders generally don’t charge origination fees as federal loans do.

Before taking out loans, compare federal and private options carefully. Federal loans typically offer more borrower protections, income-driven repayment plans, and loan forgiveness options, while private loans may offer lower interest rates for creditworthy borrowers but fewer repayment benefits. Understanding the terms of your loans before borrowing can help you make informed financial decisions and manage student debt responsibly.

Scholarships

Scholarships are an excellent way to offset the cost of college without taking on debt. Unlike student loans, scholarships don’t need to be repaid, making them one of the best ways to fund higher education.

There are several different types of scholarships available to students, including:

• Need-based scholarships: Awarded based on financial need, these scholarships are available from high schools, colleges, state programs, and private organizations. If you come from a lower- income background, you may qualify for these opportunities.
• Merit-based scholarships: These scholarships focus on academic achievements, athletic performance, artistic talents, or leadership skills rather than financial need.
• Essays and contest scholarships: Some scholarships require applicants to submit essays, videos, or other creative projects. Winners may be selected randomly or by a panel of judges.

In general, you must apply for scholarships. Many scholarship applications also require an essay and a resume. Think about your experiences and write a general essay about your obstacles, performance, and experiences. Scholarships can significantly reduce your reliance on student loans and be an essential part of any college funding strategy. By consistently applying for well-matched scholarships, you can maximize financial aid and make college more affordable.

Read More: Top 10 FAQs For Your Student Loans

Once you’ve set up a 529 plan, completed the FAFSA, explored student loan options, and applied for scholarships, you’ll have a clearer picture of how to finance college. While paying for higher education can be challenging, careful planning and informed decision-making can make it more manageable.

Remember, the financial choices you make today will impact your future. Start planning early, take advantage of all available aid, and seek guidance when needed. With a strategic approach, you can minimize debt and set yourself up for long-term financial success.  

 

 

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