Welcome to your College Funding Roadmap!
College costs continue to rise, but with the right strategy and timeline, you can build a solid funding plan. This guide walks you through strategies, account options, and action steps based on your child's age.
Understanding the College Cost Landscape
Current Average Costs (2024-2025 Academic Year)
| School Type |
Tuition & Fees |
Room & Board |
Total Annual Cost |
| Public In-State (4-year) |
$11,260 |
$12,770 |
$24,030 |
| Public Out-of-State (4-year) |
$29,150 |
$12,770 |
$41,920 |
| Private (4-year) |
$41,540 |
$14,650 |
$56,190 |
Pro Tip: Use a 5-6% annual inflation rate when projecting future college costs. A school costing $25,000 today will likely cost $40,000+ in 10 years.
529 Plans: The Cornerstone of College Savings
What is a 529 Plan?
A 529 plan is a tax-advantaged investment account designed specifically for education expenses. Money grows tax-free and can be withdrawn tax-free when used for qualified education expenses.
Types of 529 Plans
College Savings Plans (Investment-Based)
Account value fluctuates based on market performance. Most common type.
✓ Advantages
- Higher growth potential
- Can be used at any eligible school nationwide
- Age-based portfolios automatically adjust risk
- Can change beneficiary to another family member
✗ Considerations
- Investment risk - account can lose value
- No guarantee of returns
- Limited investment options
Prepaid Tuition Plans
Lock in current tuition rates at participating schools.
✓ Advantages
- Guaranteed to keep pace with tuition inflation
- No investment risk
- Predictable future value
✗ Considerations
- Limited to participating schools (usually in-state)
- Doesn't cover room & board
- Less flexibility if child chooses different school
- Many states have closed these programs
529 Plan Tax Benefits
- Federal: Tax-free growth and tax-free withdrawals for qualified expenses
- Texas: No state income tax, so no state deduction (but still get federal benefits)
- Gift Tax: Contributions up to $18,000/year per beneficiary qualify for annual gift tax exclusion ($36,000 for married couples)
- Special Rule: Can superfund with $90,000 ($180,000 married) upfront by electing 5-year gift tax averaging
Texas Residents: While Texas has no state income tax deduction, you can use ANY state's 529 plan. Consider low-fee options like Utah, Nevada, or New York plans.
Alternative College Savings Strategies
Roth IRA for College
Can withdraw contributions (not earnings) anytime tax and penalty-free. After age 59½, can withdraw earnings penalty-free for education.
✓ Advantages
- Flexibility - money can be used for retirement if not needed for college
- Lower impact on financial aid (retirement assets often excluded)
- More investment options than 529
✗ Considerations
- Lower contribution limits ($7,000/year in 2024)
- Income limits may restrict eligibility
- Earnings withdrawn before 59½ may trigger taxes/penalties
Custodial Accounts (UTMA/UGMA)
Accounts held in child's name with adult as custodian until age of majority (18-21 depending on state).
✓ Advantages
- No contribution limits
- Can be used for anything benefiting the child
- No withdrawal restrictions
✗ Considerations
- Assets belong to child - they control at 18/21
- High impact on financial aid (counted as student asset)
- Kiddie tax applies to unearned income over $2,500
- No tax advantages for education
Coverdell ESA
Education savings account with $2,000/year contribution limit.
✓ Advantages
- Can be used for K-12 expenses (not just college)
- Wider investment options than 529
- Tax-free growth and withdrawals
✗ Considerations
- Very low contribution limit ($2,000/year)
- Income limits for contributors
- Must be used by age 30 or transferred
College Funding Timeline: What to Do When
Birth to Age 5
Foundation Phase: Start Early, Start Small
- Open a 529 plan - Even $25-50/month compounds significantly over 18 years
- Set up automatic contributions - Make saving effortless with monthly transfers
- Request 529 gifts - Ask grandparents and family to contribute instead of toys
- Choose age-based portfolio - Automatically adjusts from aggressive to conservative
Rule of Thumb: $200/month from birth = ~$75,000 at 18 (assuming 6% return). That covers most in-state public schools!
Ages 6-10
Building Phase: Increase Contributions
- Increase monthly savings as income grows - Try to add 10-20% more each year
- Deposit windfalls - Tax refunds, bonuses, etc. into 529
- Review investment allocation - Ensure it matches your risk tolerance and timeline
- Educate your child - Start age-appropriate conversations about college and costs
- Track progress - Calculate how much you're on track to have at age 18
Ages 11-14
Acceleration Phase: Maximize Growth
- Project total costs - Research likely schools and create realistic cost estimates
- Calculate funding gap - Determine shortfall between savings and projected costs
- Increase contributions aggressively - Last years of strong compound growth
- Explore scholarship opportunities - Research early what scholarships child might qualify for
- Visit colleges - Help child understand different school types and costs
- Discuss expectations - Be clear about what you can/will contribute
Ages 15-17
Preparation Phase: Strategic Positioning
- Shift to conservative investments - Reduce stock exposure 2-3 years before college
- File FAFSA practice run - Use EFC calculators to estimate financial aid eligibility
- Optimize financial aid positioning -
- Pay down consumer debt
- Avoid realizing capital gains in base year
- Consider moving student assets to parent 529
- Maximize scholarship applications - Apply for everything eligible
- Create funding strategy - Determine order: 529, scholarships, federal loans, private loans
- Understand tax credits - American Opportunity Credit worth up to $2,500/year
Financial Aid Formula: Parent assets (including 529s) assessed at 5.64% maximum. Student assets assessed at 20%. Keep college savings in parent name when possible!
College Years
Execution Phase: Smart Withdrawal Strategy
- File FAFSA by deadline - Every year, even if you don't think you'll qualify
- Use 529 funds strategically - Coordinate with scholarships and tax credits
- Track qualified expenses - Keep receipts for tuition, fees, books, required supplies
- Consider American Opportunity Credit - May be worth paying $4,000 out of pocket to get $2,500 credit
- Pay from 529 in same calendar year as expense - IRS requirement for tax-free treatment
- Understand scholarship impact - Can withdraw scholarship amount from 529 without penalty (but with taxes on earnings)
Financial Aid Fundamentals
FAFSA: Free Application for Federal Student Aid
Required for all federal aid and most institutional aid. File October 1 of senior year for maximum aid consideration.
Expected Family Contribution (EFC)
Formula considers:
- Parent income (heavily weighted)
- Parent assets (excluding retirement accounts and home equity at most schools)
- Student income (50% expected to go to college after allowances)
- Student assets (20% expected annually)
- Family size and number in college
Strategic Tip: FAFSA uses "prior-prior year" income. For 2025-26 school year (starting fall 2025), it uses 2023 tax return. Plan accordingly for bonuses, Roth conversions, etc.
Types of Financial Aid
| Type |
Repayment Required? |
Based On |
| Grants (Pell, FSEOG) |
No |
Financial need |
| Scholarships |
No |
Merit, need, or both |
| Work-Study |
No (you earn it) |
Financial need |
| Federal Direct Loans |
Yes |
Subsidized: need; Unsubsidized: all |
| Parent PLUS Loans |
Yes |
Credit check only |
Common Questions
Should I save for college or retirement?
Retirement comes first. Your child can get loans for college. You cannot get loans for retirement. A good rule: fully fund your retirement accounts before aggressive college savings.
What if my child gets a scholarship or doesn't go to college?
529 plans are flexible:
- Change beneficiary to another family member (sibling, cousin, even yourself for grad school)
- Withdraw scholarship amount without 10% penalty (but earnings are taxable)
- Starting 2024: Can roll $35,000 into beneficiary's Roth IRA (lifetime limit, subject to annual Roth limits)
- Use for graduate school, trade school, apprenticeships, or student loan repayment (up to $10k lifetime)
How much should I save?
Three common approaches:
- Full Funding Goal: Save for 4 years at in-state public school (~$100k-120k in today's dollars)
- Half Funding Goal: Save for 2 years, expect loans/scholarships/work to cover the rest
- One-Third Rule: 1/3 from savings, 1/3 from current income during college, 1/3 from loans/scholarships
Which 529 plan should I choose?
Texas residents can use any state's plan. Compare based on:
- Fees (expense ratios) - Lower is better
- Investment options - Age-based portfolios are most common
- Performance track record
- Minimum contributions
Top-rated low-cost plans: Utah (my529), Nevada (Vanguard 529), New York (NY's 529), California (ScholarShare 529)