May, 2026
It happens every spring. Parents of teenagers look up from the busyness of daily life and realize that college, once a distant milestone, is now right around the corner.
Whether it is two years away or fifteen, the financial decisions made between now and move-in day can have a lasting impact on your family’s financial picture. The good news? The families who navigate this well are not always the ones who saved the most. They are the ones who planned thoughtfully, avoided a few common missteps, and understood how all the pieces fit together.
That is what this article is about: the planning essentials and the blind spots that tend to catch even financially prepared families off guard.
The Case for Starting Early
The scale of the challenge often surprises parents. College costs have historically risen significantly faster than general inflation, and per J.P. Morgan’s College Planning Essential data, the annual average increase is approximately 5.5%. The younger a child is, the more college will likely cost in the future due to these compounding years of tuition inflation.
To put that in perspective, total private college costs are estimated to range from about $263,000 for a student starting their first year today (2026) to roughly $632,000 for a child born today. Starting the savings process early is the most effective way to address these rising figures.
The 529 Plan: Your Best Starting Point
If you have not opened a 529 yet, now is a great time to start. And if you have one, it is worth making sure it is working as hard as it can for your family. These accounts offer tax-free growth, tax-free withdrawals for qualified education expenses, and more flexibility than many people realize. Here are a few things worth knowing:
- Tax-free growth and withdrawals. Your contributions grow without being taxed, and you pay no federal tax when you use the funds for qualifying education expenses. For California residents, there is no state income tax deduction on contributions, but the long-term growth benefit is still very real.
- Superfunding. If you have the liquidity, you can contribute up to $95,000 per individual (or $190,000 as a couple) in a single year by front-loading five years of the annual gift tax exclusion. This is a powerful way to get more money compounding early, without triggering gift tax.
- The SECURE 2.0 safety net. One of the most common worries we hear is: “What if my child doesn’t use it all?” A recent change now allows unused 529 funds to be rolled into a Roth IRA for the beneficiary, up to $35,000 over a lifetime, as long as the account has been open for at least fifteen years. This takes a lot of the pressure off.
- 529s and financial aid. A parent-owned 529 is assessed at a maximum rate of 5.64% in aid calculations. Compare that to assets held in your child’s name, which are assessed at 20%. Where assets are held matters just as much as how much you have saved.
The FAFSA: More Relevant Than You Might Think
The Free Application for Federal Student Aid (FAFSA) was significantly simplified in recent years, and the updated formula now produces what is called a Student Aid Index (SAI). Think of the SAI as the government’s estimate of what your family can contribute each year toward college costs.
Here is the blind spot: many families at higher income levels assume they are completely out of the running for aid and never engage with the FAFSA strategically. That can be a missed opportunity. A few things to be aware of:
- Good news for grandparents. Under the old rules, distributions from a grandparent-owned 529 counted as student income and could significantly reduce a student’s aid eligibility. That penalty is gone under the new FAFSA. A 529 plan owned by a grandparent counts 0% toward the SAI calculation. If grandparents want to contribute to your child’s education, a 529 in their name is now a much more attractive option.
- Where assets are held matters. As previously mentioned, custodial accounts (UTMA/UGMA), or a trust, held in your child’s name are assessed at 20% in aid calculations, more than three times the rate applied to parent-owned accounts. This is worth factoring into how you structure savings.
- A note on CSS Profile schools. Many selective private universities use the CSS Profile, in addition to the FAFSA to award non-federal institutional aid. It asks more detailed questions and applies its own formula. If any of your target schools use it, a FAFSA-only planning approach may not tell the whole story.
The Income Timing Blind Spot
This is one of the most important, and least talked about, aspects of college planning. The FAFSA uses what is called prior-prior year income, which means the application filed in the fall of your child’s senior year of high school draws on your tax return from two years earlier. For a student starting college in fall 2027, the income year that matters is 2025.
Why does this matter? Because certain financial events in that base year can increase your SAI and reduce your eligibility for aid, even if you would not otherwise be close to qualifying. Events to be mindful of include:
- Roth conversions
- Large capital gain realizations
- Business distributions or the sale of a business
- Stock option exercises or settlements
- Unusually large bonuses or one-time income events
Knowing this does not always change what you do. Sometimes the financial decision is worth it regardless. But being aware of the timing means you can at least plan with eyes open. This tends to matter most for families going through a transition: selling a business, winding down a practice, or receiving a significant one-time payout.
Other Savings Vehicles Worth Knowing About
The 529 is the cornerstone of most college savings plans, but it is not the only option. Depending on your situation, a combination of vehicles may make sense. Here is a quick look at the alternatives:
- Roth IRA (parent-owned). You can withdraw your contributions (not earnings) at any time without penalty. This makes a Roth a useful backstop if college costs run higher than expected. It is not a primary college savings vehicle, but for families already maximizing other retirement accounts, it adds a layer of flexibility worth having.
- Coverdell Education Savings Account. Allows up to $2,000 per year in contributions and can be used for K–12 expenses as well as college, an advantage the 529 does not fully match. The annual limit is low relative to college costs, and higher earners may be phased out entirely, so this tends to work best as a supplement.
- UTMA / UGMA custodial accounts. These accounts are flexible and funds can be used for anything, not just education. But two things give families pause: the assets are assessed more heavily in aid calculations, and once transferred, those assets legally belong to your child at the age of majority. There is no way to reclaim them. For families who value staying in control, the 529 or a trust structure is usually the better fit.
A Few Principles That Apply No Matter Which Vehicles You Use:
- Retirement comes first. We generally recommend prioritizing retirement savings before college funding. You can borrow for college; you cannot borrow for retirement.
- Think about which assets you draw down. When tuition bills arrive, the order in which you tap different accounts (cash, appreciated securities, 529 distributions) can have real tax implications. It is worth modeling this in advance.
- Control matters. If retaining flexibility over how funds are used is important to your family, lean toward the 529 or a trust rather than a custodial account.
A Few More Topics Worth a Conversation
College planning covers more ground than any one article can do justice to. A few additional areas that often come up with families:
- Student loans and borrowing limits. Federal loan limits vary by year and student status. Understanding how much debt makes sense relative to your child’s expected career path is an important part of the plan.
- Tax credits. The American Opportunity Credit provides up to $2,500 per year for the first four years of college. It phases out at higher income levels, so not everyone will benefit. Yet it takes only a moment to confirm, and occasionally the answer is a pleasant surprise.
- Net price and merit aid. Sticker price is rarely the real price. Net price calculators and merit aid eligibility can significantly change the math, and are worth exploring well before your child applies.
Finding the right path through college planning is rarely about finding a generic solution; it is about aligning your specific income, assets, and timeline with your child’s goals. The families who navigate this milestone with the most confidence are almost always the ones who didn’t try to figure it out alone.
Conclusion: Your Next Steps
If you are approaching this season or simply need to revisit your current strategy, let’s work through the details together. I invite you to reach out to RSS to start a conversation tailored to your family’s situation.
