Financial Know-How: College Corner | Balancing College Costs and Retirement

A Guide for Parents and Grandparents

Supporting a child’s or grandchild’s education is a noble goal. However, when weighed against the need to prepare for retirement, college costs can be a competing priority. The average parent contributes $15,754 annually to college costs for undergraduates—that’s nothing to sneeze at! So, how can you pitch in on education costs while still saving for your own future goals? Great question! Let’s get into it.¹

Sustainable Contributions

While student loans and scholarships are available to help fund education, these options don’t exist for retirement prep. If you’re helping a loved one pay for school, aligning those contributions with your retirement goals in a sustainable way might be a consideration with your overall financial strategy.

Overlapping College Years

If you have multiple children in college, understanding each child’s educational goals and associated costs can help you prioritize. For example, students can fulfill general requirements at lower-cost community colleges or in-state universities before transferring to higher-cost schools.

Discuss Affordable Choices

With some creative strategizing, students may be able to pick a school that is within their financial means. Consider schools with solid financial aid packages. Work-study programs, scholarships, and part-time jobs can also help offset education costs. Involving students in the decision-making process can empower them to make informed choices about their future. 

529 Plans: A Strategic Tool

To help manage college costs, explore every available funding source. Depending on your situation, a 529 plan could provide a key starting point. These flexible tools are designed to help with the cost of qualified education expenses.

A 529 Plan Can Offer:

• Financial Aid. 529 assets are considered parental assets, which have a lesser impact on aid formulas compared to student assets. Recent FAFSA changes mean grandparent-owned 529 accounts no longer affect aid eligibility.^2,3
• Flexibility. Some 529s have fewer restrictions than other college savings options, with high contribution limits and no income or age restrictions.
• Control. Account owners retain control and have considerable flexibility around how they can use their 529 funds.

Dispelling Common Myths

1. Unused 529 funds aren’t lost. If a student doesn’t use all the money in a 529 plan, those funds can be transferred to another beneficiary. Just don’t use them for non-education purposes, or you may face a tax situation and perhaps pay a penalty.
2. Funds aren’t limited to one state. Depending on your 529 plan, it may not have any residency requirements, so the money can travel with you or your student.

A few things to keep in mind: a 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis, but state tax treatment of 529 plans is only one factor to consider prior to committing to a savings plan. You should also consider the fees and expenses associated with the particular plan you choose. Whether a state tax deduction is available will depend on your state of residence, and state tax laws and treatment may vary. Also, state tax laws may be different from federal tax laws. Earnings on non-qualified distributions will be subject to income tax and a 10 percent federal penalty tax.

Balancing Multiple Financial Goals

Balancing college costs with your retirement goals requires a strategic approach, open communication between all parties, and smart decision-making over the long haul. With the right approach, you can successfully help them prepare for their future while still keeping sight of your own.

College Savings vs. Retirement Savings: Finding a Balance

In the first scenario, the goal of retiring at age 65 is met, while approximately one-third of the $110,000 education goal is met.

In the second scenario, education is a priority, so $325 goes to that, while $775 is saved for retirement. The $110,000 savings goal for education is met, while retirement must be delayed until age 69.

The third scenario, retirement comes a little later (age 67), and two-thirds of the original $110,000 is saved for education.

Underlying assumptions: Retirement portfolio must provide $50,000 in income, using a 4 percent initial withdrawal rate. Retirement savings assume 6 percent annual return. Education savings assume 5.5 percent annual return through age 8, then 4.5 percent through age 16, and then 3.5 percent through age 18.

Past performance is not a guarantee of future results. These are hypothetical examples used for illustrative purposes only. They are not representatives of any specific strategy or investment. They are not intended as specific advice on how to approach retirement or college.

Final Thought: Align Your Withdrawal Timing

To leverage your 529 plan wisely, consider the timing of your withdrawals. When using 529 funds for college expenses in a given year, it might make sense to align those withdrawals with the same tax year as the qualified education expenses incurred.

To leverage your 529 plan wisely, consider the timing of your withdrawals. When using 529 funds for college expenses in a given year, it might make sense to align those withdrawals with the same tax year as the qualified education expenses incurred.

These plans have no specific withdrawal deadlines, and the account owner retains control over any unused assets, with options to change the beneficiary or save for future education. While this flexibility is a perk, aligning college expenses with a specific year can help avoid any penalties.

Your tax, legal, or accounting professional can show you how to get the most out of your 529 plans. A quick email or call can put you on the right track.

<sup>1. SallieMae.com, How America Pays for College, 2025
2. Fidelity.com, January 29, 2025
3. SavingforCollege.com, September 8, 2025</sup>