Smart Strategies to Pay for College

College costs have consistently outpaced inflation. While we don’t have a crystal ball, we wouldn’t be surprised if this trend continues, and we prefer to err on the side of being overprepared. In planning, cautious optimism always beats wishful thinking.  

A couple years ago, I wrote A Parent’s Guide to Paying for College. This post provides a deeper dive. Here are a few of the many factors that we consider when helping clients plan for future college expenses. 

1. 529 Plans: Recently Improved 

The 529 plan has been improved in recent years, which is a trend that we hope continues. It’s tax-advantaged, provides tax-deferred growth, and as long as the withdrawals are used for qualified education expenses, withdrawals are tax-free! 

Highlights: 

Contributions to a 529 plan can be made by anyone – parents, friends, colleagues, etc. (maybe a better birthday present for your child than a cash gift?). Although there’s no federal income-tax deduction for 529 plan contributions, some states offer a deduction for state income taxes.  

Unlike some other tax-deferred investments, there is no income limit for making 529 plan contributions, making this a great tax-deferring strategy for high earners. However, contributions are considered a gift to the beneficiary, so you’ll want to keep in mind the annual gift-tax exclusion amount (currently at $19,000 per year for 2025). Luckily, there’s a “super-funding” loophole with 529 plans. 

With super-funding, you can frontload five years’ worth of gifts into a 529 plan. That means an individual can contribute up to $95,000 in 2025 without triggering a gift tax. The best part is, if the gift tax amount increases in any of those years, you can make an additional contribution for the difference! 

529 plans have been rather restrictive in the past, but that’s slowly changing. You’ll still owe ordinary income tax and a 10% penalty tax if the funds aren’t used for qualified education expenses, but the list of qualified expenses is growing.  

Thanks to the new tax bill (The One Big Beautiful Bill), up to $20,000 can be used for qualified grade school expenses (beginning 2026), including homeschool expenses. Acceptance and placement testing, certified tutoring, and therapy for those with learning disabilities are also now considered qualified expenses.  

Options for Overfunded Plans 

Obviously, you can always withdraw the funds and pay ordinary income tax and the 10% penalty, which likely isn’t ideal. If the plan is overfunded on account of scholarships or grants, you’re able to withdraw the amount equal to the scholarship/grant amount. This is eligible to avoid the 10% tax penalty, but it will still be subject to income taxes. 

Another option is to reassign funds to someone else in your family to use for education expenses. This could be a child, niece or nephew, a sibling, or even yourself. Reassigning the 529 plan is typically very easy (you’re just changing the beneficiary) and doesn’t create a taxable event. 

Excess funds in a 529 plan can also be rolled over into a Roth IRA for the beneficiary. The annual Roth contribution limits still apply, and the lifetime amount that can be rolled over is $35,000. The 529 plan must have been open for at least 15 years, and any contributions made within 5 years before the rollover do not qualify. 

Finally, the new tax laws allow for funds in a 529 plan to be used for continuing education credits and qualified certifications. You can also use these funds to pay off up to $10,000 of student loans.  

Side Note: When applying for financial aid, funds in a 529 plan are reported as assets of the owner, not the beneficiary. This is beneficial due to the lower inclusion ratio. 

There are a lot of nuances with 529 plans, so we always recommend discussing the strategies and options with your tax professional and your financial planner to determine what’s best for you. 

2. Taxable Brokerage Account 

These may not have all the tax benefits of other account types, but that means that they also don’t have the restrictions and limitations either. These are quite possibly the most versatile accounts out there, and are a must-have in virtually any financial plan. 

529 plans are amazing for those of you who know your child is going to college, especially if they’re unlikely to get much help in the form of financial aid or scholarships. For those who don’t know, or expect your child to get a full-ride, taxable accounts are great.  

Let’s say there are some scholarships or grants involved. With a 529 plan, you can withdraw an amount equal to those without the 10% penalty, but any gain is taxed at ordinary rates. With a taxable account, however, the gain is taxed at the lower long-term rate (assuming a holding period over 1 year). This can make a huge difference in your tax liability.  

What if your child doesn’t go to college? That’s great (from your financial standpoint), you can do whatever you want with the money. Supplement retirement income, retire early, go on a shopping spree, give it away, anything you want, free of any negative tax consequences. 

If your child does go to college and receives minimal financial assistance, you can use this account to pay for any of the expenses, “qualified” or not. Your basis can be withdrawn tax-free, and long-term gains are still taxed at preferential rates.  

Depending on market conditions and your tax-planning strategy, you may even be able to use these funds tax-free. If you’ve been growing the account and actively harvesting tax losses, you may have enough carry-forward losses to cover the costs. However, given the cost of college these days, this isn’t a very likely scenario, but tax-loss harvesting can definitely help lighten the tax load. 

3. Student Loans 

Obviously, there’s always the student loan option. These generally require a co-signer due to limited credit history of the student. A good work-around for that is to add your child as an authorized user on your credit card (assuming you have decent credit) to give them some credit history. Just be careful if you’re letting them use the credit card! 

If you’re going with student loans, federal student loans are generally more flexible with repayment strategies, but you’ll definitely want to review and compare the options. It’s a good idea to send these over to your financial planner for a more in-depth look.  

If possible, try to get subsidized student loans. These are need-based federal loans, so they’re difficult to qualify for, but the interest on the loans is paid for by the government while your child is in school or in the deferment period. With unsubsidized loans, interest starts to accrue as soon as the funds are disbursed. If interest payments aren’t made while in school or in a deferment period, this interest will compound, making it more difficult to pay off in later years.  

When it comes to student loans, there is one crucial aspect that is often overlooked by many students and parents. Don’t take out more loans than you need!  

It’s so easy to get caught up in the excitement and hassle that you just accept the maximum loan being offered and use the excess funds for living or recreational expenses. Remember, student loans charge interest, and it’s incredibly difficult to get them discharged, even with bankruptcy.  

4. Other Strategies 

As mentioned in A Parent’s Guide to Paying for College, Roth IRAs and savings accounts can also be used. While Roth IRAs do provide substantial tax benefits, it’s generally better to keep these funds for retirement. Especially with all the recent changes to 529 plans.  

There’s also UTMA and UGMA accounts. These accounts are essentially just taxable brokerage accounts for minors. They have the same tax treatment and the same versatility. However, there are two important items to consider: 1) this is an irrevocable gift to the minor – meaning this money is theirs to do with as they please (once they reach the age of majority as defined by your state). 2) When applying for financial aid, these are considered assets of the student, which could hinder their chances of receiving aid. 

There’s always the option to pay cash from income. This is a great choice if you have a lot of discretionary income and don’t want to liquidate any investments. Or if your child received scholarships or grants that make the expenses affordable, and you want to keep your investments working for you. However, the only tax benefits are the American Opportunity and Lifetime Learning credits, which aren’t very substantial. 

There are also work-study programs that can be used to offset some of the costs. These generally depend on the school and the area of study, but they are worth mentioning. It’s your child’s education, so it’s not a bad idea for them to have some skin in the game. 

Optimize Your Payment Strategies 

In a perfect world, you have a wealthy friend or relative who is willing to pay for your child’s education. As long as they make payments directly to the school, then it’s not a taxable gift. But I highly doubt that’s the case, otherwise you wouldn’t be reading this. 

A blended approach is generally ideal, especially if you’ve planned well-enough in advance. It may be a good idea to use the 529 plan for all qualified expenses, then use up your carry-forward loses in your taxable brokerage account combined with income to cover additional expenses. 529 plans are more restrictive, so you’ll want to use them up, unless you have other beneficiaries to transfer the unused funds to. 

With 529 plans, you can typically set it up to have the funds transferred directly to the college. You should be able to do this with your taxable brokerage account as well. However, these may not be the best strategies. 

To fully optimize, if you’re disciplined enough and have enough of a limit, consider putting as many of these expenses as possible on your credit card. Make sure your credit card has decent rewards; cash back or something that you will actually use. If not, it might be worth it to apply for one that does. 

You’ll want to keep accurate records of all education expenses for reimbursements and taxes. Whenever you pay with your credit card, request a distribution from your 529 plan, taxable brokerage account, or other source of funds. Use those distributions to pay off your credit card immediately after the statement date (some cards don’t apply points until the statement posts).  

This strategy provides an immediate “discount” through your credit card rewards. It may only be a small percentage, but with the increasing costs of college, a small percentage can be a big difference in cash flow. Especially when combined with tax-free income from a 529 plan, Roth IRA, or carry-forward tax-loss harvesting. To add icing on that, you can still claim the education tax credits for any expenses not covered by the 529 plan (assuming you’re within the income limits).  

Here’s a quick and generic example: 

Assume one year of college tuition and qualified expenses costs $50,000 and you get 2% cash back with your credit card. You pay the $50,000 with your credit card, get $1,000 cash back (which isn’t taxable). You reimburse yourself for $40,000 from the 529 plan, and $10,000 from your taxable brokerage account (realizing no capital gains due to carry forward losses). You’ve generated no additional tax liability and saved $1,000. If your MAGI is under the AOC limit, you can also get the American Opportunity Tax Credit up to $4,000. Now you’ve just saved $5,000 (or 10% of the college costs).  

Final Thoughts   

There are a variety of ways to save for and pay for college. Each strategy comes with its own set of risks, rewards, and tax implications. The best option is dependent on your individual situation, so it is highly recommended to seek out the guidance of a tax professional and financial planner. This will help to ensure that you abide by all applicable rules and regulations and come up with a strategy that’s tailored to your needs. 

College may be expensive, but it doesn’t have to be a financial burden.