Education planning: How to optimize your budget to save for schooling

by Gina Coletti

Education planning is a critical component of long-term financial strategy for growing families. From K-12 schools to elite universities, education costs are rising, which makes it necessary to start budgeting early. Early investment not only maximizes the benefits of compounding interest but also provides families with greater flexibility and peace of mind as their children grow. Even modest, consistent contributions accumulate over time, making the dream of a debt-free education more attainable.

What are the benefits of 529 plans?

One of the most helpful tools for education budgeting is the 529 plan. These tax-advantaged accounts allow families to invest post-tax dollars, grow those investments tax-free, and withdraw funds for qualified education expenses without incurring taxes. The flexibility of 529 plans is particularly valuable for families with multiple children or unique family dynamics. Funds can be transferred between siblings, cousins, or other family members if the original beneficiary does not use the account, ensuring the investment is not wasted.

Additionally, 529 plans are no longer limited to higher education; they can now be used for qualified K-12 expenses, broadening their functionality. Setting up automatic monthly contributions, even as low as $50, can help families accrue a substantial education fund over time.

What if college plans change?

Education plans do not always unfold as expected. If a child decides not to attend college or leaves school early, 529 plan funds can be transferred to another family member. Alternatively, funds can be withdrawn, but be aware that taxes and penalties may apply to the earnings portion. Importantly, families will always be able to recover at least their original investment.

Exploring alternative education funding options

While 529 plans remain one of the most effective and tax-advantaged tools for education savings, families may want to explore additional options that offer different levels of flexibility and control.

Custodial Accounts (UGMA/UTMA)

For families seeking maximum flexibility, custodial accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) allow adults to gift funds to a minor, which can then be used for education or any other expense that benefits the child. Unlike education-specific accounts, these funds are not limited to schooling costs, which can be helpful for families with evolving needs. However, once the child reaches the age of majority (typically 18 or 21, depending on the state), the assets become fully theirs to use at their discretion. This transfer of ownership can also affect the child’s eligibility for financial aid, as the account is considered part of their personal assets.

Coverdell education savings accounts (ESAs)

Coverdell ESAs function similarly to 529 plans by allowing for tax-free growth and withdrawals when used for qualified education expenses. However, they provide added flexibility—particularly for families with younger children—by covering a broader range of K–12 expenses, including private school tuition, books, tutoring, and even certain extracurricular programs. They also offer more diverse investment options than traditional 529s. That said, the annual contribution limit is relatively modest at $2,000 per beneficiary, which may not be sufficient for families with ambitious savings goals.

Four smart budgeting strategies worth considering

Aligning expectations and resources

Within families that have access to trusts or intergenerational wealth, it may not be clear to beneficiaries whether or in what circumstances these resources are intended to cover their children’s education.

Open family discussions are crucial to clarifying expectations and responsibilities. Understanding whether, and how much, grandparents or other relatives plan to contribute can significantly impact the goals for parents who also plan to save independently. These conversations should happen early, ideally before children reach school age, to avoid last-minute surprises and ensure that everyone is in agreement.

Leveraging tax-efficient gifting strategies

Grandparents may wish to contribute to a grandchild’s education, and direct payment of tuition to educational institutions can present a powerful tax-saving strategy. While annual gift tax exclusions limit the amount that can be given tax-free to individuals, there is no limit on the amount that can be paid directly to a qualifying school for tuition. This allows grandparents to support their grandchildren’s education without incurring gift taxes or affecting their lifetime gift tax exemption.

This approach not only helps fund education but also serves as an effective way to shift wealth across generations in a tax-efficient manner.

Public vs. private K-12 schooling

While many high-earning families opt for private schooling, it is important to weigh the long-term financial impact. In many areas, public schools provide excellent education, and funneling resources toward college savings rather than private K-12 tuition can be a more strategic use of funds, particularly if weathering market downturns and volatility is a concern. Each family’s situation is unique, and decisions should be based on values, educational goals, financial priorities, and risk tolerance.

Encouraging financial responsibility in the next generation

Even for families with significant resources, many parents choose to have their children contribute to their own higher education. This approach can foster a sense of ownership, responsibility, and investment in their academic journey. Deciding how much, if any, of the education costs children should cover is a personal choice, but it is an important consideration in the overall budgeting process.

Maximize educational opportunities and wealth preservation

Education budgeting involves more than just setting aside money; it requires strategic planning, open communication, and thoughtful use of tax-advantaged tools. By starting early, leveraging 529 plans, engaging in family discussions, and making informed choices about each child’s educational journey, families can ensure their children have access to educational opportunities while preserving and growing their wealth for future generations. Nixon Peabody Trust Company’s objective guidance and personalized approach can help families navigate these considerations with confidence.

FAQs

What is education planning?

Education planning is about more than just saving for tuition—it’s a way to understand the full cost of going to college or a career school and figure out how to pay for it all.

The process often starts by considering key decisions, like which school to attend, what you want to study, and your living arrangements while studying. These choices affect your expenses, which go beyond tuition to include things like housing, books and supplies, and daily living costs.

Additionally, scholarships, student loans, and other financial aid options can play a big role in your education plan. By taking all these factors into account, education planning helps you prepare for the real price of your education and avoid unexpected financial stress later on.

Why budget for school fees?

Budgeting for school fees helps you plan ahead, avoid surprise expenses, and make smarter financial decisions. It ensures you have the funds when you need them—whether for tuition, books, or travel—so you’re not scrambling mid-term. A good budget can also highlight where you might be able to save or redirect money toward other priorities.

What if I need to take out a student loan?

If you find that your savings, income, or financial aid won’t fully cover your education costs, student loans can help bridge the gap, but it’s important to understand what you’re signing up for.

There are two main types of student loans: federal loans and private loans.

• Federal student loans are offered by the US Department of Education and are usually the first option to consider. They often come with lower interest rates, flexible repayment options, and protections like income-driven repayment plans or loan forgiveness programs. Examples include:
  • Direct subsidized loans—based on financial need; the government pays the interest while you’re in school.
  • Direct unsubsidized loans—not based on need; you’re responsible for the interest from the start.
  • PLUS loans—available to graduate students or parents of undergraduates; require a credit check and usually have higher interest rates.
• Private student loans are provided by banks, credit unions, or other lenders. These may help if federal loans and other resources aren’t enough, but they often have higher interest rates and fewer repayment protections. Eligibility typically depends on your credit score or a co-signer’s.

Whichever type of loan you consider, make sure to include it in your budget. Think about how much you’ll need, what repayment will look like after graduation, and how much total debt you’re comfortable with. Borrow only what’s necessary, and treat your loan like a financial commitment, not just a quick fix.

How can financial advisors and planners help?

Financial advisors can help you see the bigger picture. They’ll work with you to build a tailored plan, optimize savings options, like 529 Plans or ESAs, and even help estimate future costs. A good advisor can also flag tax benefits, help you avoid common mistakes, and give you confidence in your financial choices.

Gina Coletti
Chief Fiduciary Officer
Office: +1 617.345.1110
gcoletti@nixonpeabody.com