College Planning Is More Than Choosing a School
September is College Planning Month—a good reminder that preparing for college involves more than campus visits, applications and choosing a major. For families, it also means preparing financially for what can be one of their largest future expenses.
Whether college is still years away or quickly approaching, having a plan can help families better understand their options and make informed decisions about how education fits into their overall financial picture.
And college planning isn't only for parents. Grandparents and other family members may also choose to make education part of the legacy they leave for the next generation.
Start With the Bigger Picture
When families think about college savings, the first question is often, How much should we save? But college planning should be considered alongside other financial priorities.
How much of your child's education would you like to fund? How many years do you have to prepare? And how can you work toward that goal without losing sight of retirement and other long-term needs?
There isn't one answer that's right for every family. A financial advisor can help evaluate these priorities and develop a strategy based on your goals, resources and timeline.
Understanding 529 Plans
One tool commonly used for education planning is a 529 plan, a tax-advantaged account designed to help families save for qualified education expenses.
Contributions are generally made with after-tax dollars, investments have the opportunity to grow tax-deferred, and withdrawals used for qualified education expenses are generally free from federal income tax. Depending on applicable rules, funds may be used for expenses such as tuition, fees, books, supplies, equipment, and certain room-and-board costs. Many states—including West Virginia and Ohio—also offer state income tax deductions for contributions to their 529 plans.
529 plans can also offer flexibility if plans change. In many circumstances, the beneficiary can be changed to another qualifying family member. Certain unused 529 assets may also be eligible for rollover to the beneficiary's Roth IRA, subject to specific requirements and limitations.
529 plans aren't limited only to college, either. Funds may also be used for K–12 tuition up to annual federal limits, certain apprenticeship program costs, and even limited student loan repayment, subject to applicable rules.
Because rules and state tax benefits vary, it's important to consider how a 529 plan fits into your family's broader financial strategy.
Don't Overlook Financial Aid and the FAFSA
Saving is only one part of the college funding picture. Financial aid—including grants, scholarships, work-study, and federal student loans—can also play an important role in making college more affordable.
The starting point for most aid is the Free Application for Federal Student Aid, or FAFSA. Completing the FAFSA is how families become eligible for federal aid, and many states and colleges also use it to determine their own grants and scholarships. Even families who assume they won't qualify may benefit from filing, since some schools require it for merit-based awards. The FAFSA generally becomes available in the fall of the student's senior year of high school, and because some aid is awarded on a first-come, first-served basis, filing early can be an advantage.
It's also worth understanding how savings and income may affect aid eligibility. Assets owned by a parent—including parent-owned 529 plans—are generally assessed differently than assets owned by the student, so how accounts are titled and when funds are withdrawn can influence a family's aid picture.
Families may also be eligible for education tax credits, such as the American Opportunity Tax Credit. Coordinating 529 withdrawals with these credits matters, because the same expenses generally can't be used for both—one more reason college funding decisions are worth considering as part of a broader financial strategy.
Education as Part of Your Legacy
For grandparents, helping fund a grandchild's education can be a meaningful way to make an impact on the next generation during their lifetime.
Recent changes to the FAFSA have also made grandparent-owned 529 plans more attractive, as distributions from these accounts are generally no longer reported as student income for federal financial aid purposes. In addition, special gifting rules may allow larger lump-sum contributions to a 529 plan for gift tax purposes.
Contributing to a 529 plan or incorporating education funding into a broader gifting strategy can make college planning part of a family's legacy planning conversation.
It raises an important question: What do you want the wealth you've built to accomplish for the generations that follow?
For some families, that may mean leaving an inheritance. For others, it may include helping children or grandchildren pursue an education with less financial burden.
Create What's Next
College planning doesn't have to start with knowing all the answers. It can start with a conversation.
At DeFranco Financial, our financial advisors can help families explore college planning strategies, understand options such as 529 plans, and consider how education funding fits alongside retirement, estate, and legacy goals.
Whether college is years away or just around the corner—or you're a grandparent looking for a meaningful way to help the next generation—having a plan can help you prepare for what comes next.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.