Plan the Right College Savings Strategy for Your Family

For parents of young children, the cost of a college education can seem like a distant and daunting concern. But financial advisors generally say the best time to start saving is right now, even if the amounts are small.

“It's never too soon to start saving. Even if you just put $25 a month away, it's something,” said Al Todd, a financial advisor with Thrivent in Pittsburgh.

That kind of early action can make a meaningful difference when tuition bills arrive. Here is what families need to know about the most common college savings options, how to invest wisely, and how to balance competing financial priorities without overextending themselves.

Choosing the right savings vehicle

The 529 plan is a widely used college savings tool available to families. Sponsored at the state level, these plans allow money to grow tax-deferred and to be withdrawn tax-free when spent on qualified education expenses.

One frequently overlooked detail that’s a huge perk of 529 plans is that families are not required to use the plan offered by their home state.

“There is flexibility in a 529 plan,” Todd said, noting that a Pennsylvania family could open a Michigan 529 and still use the funds at any accredited school in the country.

Pennsylvania, however, offers a particularly attractive benefit for residents. According to Todd, it is one of the only states in the country where contributions to a 529 plan — in Pennsylvania or any other state — qualify for a state income tax deduction.

Pennsylvania’s 529 College and Career Savings Program includes two main options. The Guaranteed Savings Plan allows families to effectively lock in today’s tuition rates at certain schools, providing a buffer against tuition inflation. The Investment Plan offers a range of portfolio options tailored to college savings timelines, giving savers the potential for higher long-term growth.

Another benefit for Pennsylvania families: 529 plan assets are not included in the calculation used to determine student aid eligibility in the state. It’s a significant advantage that can help preserve financial aid options down the road.

Beyond the 529: custodial accounts

Families looking for more flexibility may also consider a UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) account. These custodial accounts are opened in the child’s name, with a parent or guardian listed as the custodian.

While 529 funds must be spent on tuition and related educational expenses, money held in a UTMA or UGMA account can be used for any expense that benefits the minor.

That broader scope comes with trade-offs, however. Tim Buggy, a Certified Financial Planner® professional and Retirement Planning Specialist* at First Choice Advisors in Wexford, explained that UTMA accounts offer some tax advantages. The first portion of a child’s unearned income is tax-free, with the next portion taxed at the child’s rate.

However, another consideration is the tax benefits of a 529 plan when the goal is specifically college savings and associated qualified expenses. Earnings on noneducational withdrawals from a 529 plan are subject to income tax plus a 10% penalty, so families should plan carefully, he said.

Both advisors emphasized that the right choice depends entirely on a family’s individual situation.

“This is a choice for families, not a recommendation,” Buggy said. “I suggest that you speak with your financial advisor because they have a complete picture of your investment portfolio to assist you with your decision.”

How much should you save?

There is no universal monthly savings target that works for every family. Buggy pointed to several factors that shape the equation, including the family’s overall budget, the number of children expected to attend college, whether those children are likely to attend a private or public institution, projected tuition increases, and the potential for scholarships or financial aid to offset costs.

Todd was candid about the reality many families face.

“In my experience, it’s the exception that parents have enough to save to fully cover a four-year education in today’s academic and economic environment,” he said.

One practical advantage of the 529 is that anyone can contribute — parents, grandparents or family friends — which can accelerate savings over time.

Investing for growth over time

When a child is young, time is an asset. Buggy might recommend an aggressive investment mix for children under 10 — typically around 80% to 90% stocks, 10% to 20% bonds and minimal cash — and its associated risk level can maximize growth potential over the years.

As the child enters high school and approaches college age, generally speaking, the portfolio might gradually shift to a more conservative allocation, with a common mix of 30% to 50% stocks, 40% to 60% bonds and 10% to 20% cash by the time college is a few years away.

For families who prefer a hands-off approach, many 529 plans offer age-based or age-weighted portfolio options that automatically adjust the investment mix over time.

“These funds start with a higher allocation to stocks when your child is young and gradually shift toward bonds and cash as college draws closer, making it a convenient and effective strategy for families,” Buggy said.

Balancing college savings with everything else

For many parents, college savings competes with other pressing financial goals. Advisors say the key is to approach it with a clear order of priorities.

Buggy might recommend starting with a solid emergency fund covering three to six months of living expenses, then paying down high-interest debt before directing additional dollars toward college savings. Most critically, he said, retirement savings should come first.

“Most of the time, I’m guiding my clients to make sure they’re adequately saving toward their retirement primarily, with college expenses coming second,” said Todd. “The rationale behind that is if you get to retirement and you don't have enough money to retire on, there are no lower-cost loans available from the government to fund your retirement. Conversely, there are student loans available to students and parents to shore up any shortfalls in college savings.”

Where to start

For families ready to take the first step, Todd recommended exploring resources at savingforcollege.com and collegesavings.org, as well as Pennsylvania’s own 529 program website. A consultation with a financial advisor can help map out a savings strategy that fits a family’s full financial picture.

“Just start somewhere,” said Todd. “The earlier a family begins saving, even in modest amounts, the greater the opportunity for that money to grow.”

IMPORTANT: 529 Plan investors should carefully consider the investment objectives, risks, charges and expenses of a plan before investing. All plan documents and related prospectuses, which are available from your duly registered Financial Professional and the particular fund company, contain this and other information about the plan and should be read carefully before investing. 529 Plans are intended for use only as means for saving for qualified higher education expenses. They are not intended for the purpose of evading federal or state taxes or tax penalties. 529 Plan investors should seek tax advice from an independent tax adviser based on their own particular circumstances. All investing involves risk, including loss of principal invested.

* Retirement Planning Specialist title awarded by Equitable Advisors, based upon receipt of a Certificate in Retirement Planning from the Wharton School of the University of Pennsylvania. Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks. Timothy Buggy, CFP® offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC, offers investment advisory products and services through Equitable Advisors, LLC, an SEC-registered investment advisor, and offers annuity and insurance products through Equitable Network, LLC. PPG-8789121.1a(02/26)(exp.02/30)