Creating a Smart Financial Strategy to Pay for College

Starting with the Right Foundation: College Planning as Part of Your Overall Financial Strategy 

College planning shouldn't exist in isolation. Rather than treating education funding as a separate goal, incorporate it into your comprehensive financial plan alongside retirement, emergency savings, and other priorities. This holistic approach ensures you're not sacrificing essential goals (like your retirement) while helping your children achieve their educational dreams. 

Remember this golden rule: you can borrow for college, but you can't borrow for retirement. While supporting your children's education is important, it shouldn't come at the expense of your long-term financial security. 

When to Start and How Much to Save: The Early Bird Gets the Compound Interest 

One of the most powerful strategies for college funding is simply starting early. Even small contributions can grow significantly over time thanks to compound interest. Ideally, begin a college fund as soon as your child is born—even modest monthly contributions can accumulate substantially over 18 years. 

Determining Your Savings Target 

Rather than automatically aiming to cover 100% of potential college costs, consider these questions: 

• Do you want your child to have "skin in the game" through part-time work or taking responsibility for some expenses? 
• What type of institution might your child attend? (Community college, public university, private college) 
• Will your child be eligible for merit scholarships or need-based aid? 
• Are there other family members (like grandparents) who might contribute? 

These factors will help determine a realistic savings goal that fits within your overall financial plan. 

529 Plans: The College Savings Workhorse 

A 529 college savings plan is often the cornerstone of college savings strategies, offering tax-advantaged growth and tax-free withdrawals when used for qualified education expenses. But there are some essential things to know when setting one up. 

Flexibility Is Key: One common concern about 529 plans is "What if my child doesn't go to college?" Fortunately, these plans offer considerable flexibility: 

• Funds can be used for trade schools and vocational programs, not just traditional colleges 
• You can change the beneficiary to another family member (including yourself!) 
• Under the SECURE Act, you can now use up to $10,000 from a 529 plan to repay student loans 
• You can even roll over up to $35,000 into a Roth IRA for the beneficiary (subject to certain restrictions) 

Grandparent-Owned 529 Plans: Is it beneficial for grandparents to fund a 529 plan? Absolutely! Grandparent contributions can be an excellent way to help fund education while potentially reducing their taxable estate. Recent FAFSA changes have eliminated the previous concern about grandparent-owned 529 distributions negatively impacting financial aid eligibility. Now, these distributions no longer count as student income on the FAFSA, making grandparent 529 plans even more attractive. 

Understanding Financial Aid Changes 

The financial aid landscape continues to evolve, and recent changes to the FAFSA (Free Application for Federal Student Aid) have significant implications for families: 

The "Sibling Discount" Is Gone: Previously, having multiple children in college simultaneously could increase your family's aid eligibility. Under new rules implemented in 2023, this "sibling discount" has been eliminated. Your Expected Family Contribution (now called the Student Aid Index) is no longer divided among multiple enrolled children. 

Student Borrowing Limits: It's crucial to understand that federal student loan limits are relatively low compared to the actual cost of attendance. Dependent undergraduate students can only borrow between $5,500 and $7,500 annually in federal Direct loans, with a cumulative limit of $31,000. This often creates a funding gap that must be filled by parent loans, private loans, or savings. 

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Alternative Strategies to Consider 

Merit Aid Opportunities: Many schools offer significant merit scholarships based on academic achievements, special talents, or other factors—not financial need. Research institutions that are generous with merit aid if your student has strong academic credentials. 

Strategic College Selection: Consider the financial implications of different types of institutions. For some students, beginning at a community college before transferring to a four-year school can dramatically reduce costs while still resulting in the same degree. 

Roth IRAs as Supplemental College Funds: While primarily retirement vehicles, Roth IRAs offer flexibility for education funding. Contributions (but not earnings) can be withdrawn at any time without penalties, and after age 59½ and five years, all withdrawals are tax-free. This dual-purpose approach provides flexibility if your child receives unexpected scholarships or chooses not to attend college. 

Resources to Guide Your Planning 

For detailed information on college savings strategies, financial aid, and cost comparisons, I highly recommend savingforcollege.com. This comprehensive resource offers calculators, state tax benefit information, and side-by-side 529 plan comparisons to help you make informed decisions. 

Creating Your College Funding Strategy 

Every family's approach to college funding should be as unique as their children. The right strategy balances realistic saving goals with other financial priorities while considering your values regarding education and financial responsibility. 

At WHZ Strategic Wealth Advisors, our Plan Well, Invest Well, Live Well™ process helps families develop comprehensive financial plans that incorporate education funding alongside other important goals. We can help you determine appropriate savings targets, select the right vehicles, and adjust your strategy as your family's needs evolve. 

To discuss how college planning fits into your broader financial picture, schedule a complimentary consultation on our website at whzwealth.com or call us at (860) 928-2341. We're committed to providing you with Absolute Confidence and Unwavering Partnership. For Life.  

Authored by Senior Vice President, Financial Advisor Leisl L. Langevin CFP®, CDFA®. AI may have been utilized for initial research and drafting of this piece. The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax free, earnings must be used to pay for qualified education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10 percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.  

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084, 860.928.2341. http://www.whzwealth.com These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your financial advisor. WHZ Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice.