Carnegie Investment Counsel Blog


Paying for College: Your Financial Planning Questions Answered by a Recent New Father

Posted by Bryan Blackburn, CFP® on Jun 16, 2020 1:30:00 PM
Bryan Blackburn, CFP®


Questions about paying for college? Despite the ups and downs of the world today, a college education provides a significant advantage in today’s job market for your child or grandchild. In fact, it is known to provide higher earnings potential throughout your child’s entire working life.  But how to pay for college with rising costs today?  

We answer your questions about paying for college below:


When should I start saving to fund my child's college education?

It is important to start saving as soon as possible to reap the rewards of compound growth. Compounding can help offset the inflation of college tuition. For the 2019–2020 school year, the average cost of tuition and fees was around $41,426 at private colleges, $11,260 for state residents at public colleges and $27,120 for out-of-state students at state schools, according to data reported to U.S. News in an annual survey. Plus, don’t forget college costs have historically increased between 5 to 7 percent per year on average. 

As a rule of thumb, I recommend getting started with college savings as soon as your child is born. Every account has a beneficiary, so you need to wait until you have a Social Security number for the child to create the account. In my (very recent) experience, we received my daughter’s Social Security card about a week or two after she was born. Receiving the card is a good reminder to open a college savings plan immediately.


How much should I set aside each year for my child’s education? 

Since there is no generic guideline, we typically do a custom calculation based on specific assumptions for every unique situation. The type of schooling you’re saving for and the age of your child when you begin saving are two important variables in that calculation. Do you want to save for a four-year public school in your state, a four-year private school or some other option? Based on these factors and reasonable inflation and investment growth assumptions, we can calculate how much you should set aside each year for your child’s education.


How often should I put away funds to save for my child’s college education?

Create good savings habits by setting aside a fixed amount as a monthly payroll deduction. This amount will vary based on your child’s age and your customized goal. At the very least, you should set aside funds yearly. I have many clients who set aside enough for a four-year, in-state public school and plan for the child to cover any gaps if he or she eventually chooses a more expensive option for higher education. Students can fund the difference in the form of their savings, scholarships, student loans or job earnings while in high school or college. Some of my other clients want to save more than enough for the most expensive option out there. It depends on your goals.


What are the vehicles you recommend most for saving for my child’s college tuition and why?

The tax advantages of these three vehicles make them attractive for saving for college. Like any investment account, you can set up automatic deposits to provide the structure and discipline to set that money aside regularly. Here are some options:



529 College Savings Plans

Educational Savings Accounts (ESA)

Custodial Accounts

Who has ownership/control?

Account Owner or Custodian. Usually the parent or grandparent.

Account Owner or Custodian. Usually the parent or grandparent.

Custodian until child reaches age of majority

What are the investment options?

Limited menu of mutual funds and index funds

No restrictions

No restrictions

Are there age limits?


Except for special needs children, no contributions can be made after a child reaches age 18, and withdrawals must be made before the beneficiary reaches age 30.

Account ownership transfers to the beneficiary/minor upon reaching age of majority.

What expenses are covered besides tuition and fees?

Room and board. Apprenticeship program expenses. Up to $10,000 per year for public, private, religious elementary or secondary (K-12) tuition expenses.

Qualified elementary and secondary education expenses or qualified higher education expenses. This is more liberal than a 529 and can be used for both secondary and higher education without limits. 

No restrictions on types of expenses. You can use money from a custodial account for any expense that is for the benefit of the minor. 

Are there contribution limits? (Note: Each account is for one beneficiary only, meaning each child will need an account.) 

This varies from plan to plan by state because each state sponsors its own 529 plan. The majority of plans permit total contributions in excess of $250,000 per beneficiary.  

Contributor: $2,000 per beneficiary per year 


Beneficiary: $2,000 per beneficiary per year


See income phase-outs for making contributions below.

No limit

What are the tax advantages?

Earnings grow free from Federal income tax if used for qualified education expenses. In addition, some states offer state income tax deductions for contributions.  (For example, in Ohio, up to $4,000 per beneficiary)

Earnings grow free from Federal income tax if used for qualified education expenses.

Earnings are subject to “kiddie tax”, which is not as favorable as the tax-free growth in 529s or ESAs.


Kiddie Tax:

  • First $1,100 of income is free of federal tax.
  • Next $1,100 of income is taxed at child’s tax rate.
  • Income above $2,200 is generally taxed at the parent’s marginal tax rate.

Are there income phase-outs for contributions? 


Single filers:

$95,000 – $110,000 modified adjusted gross income 


Joint filers:

$190,000 – $220,000

modified adjusted gross income 



Are there penalties for non-qualified withdrawals?

Earnings subject to federal income tax and any applicable state/local income tax. In addition, a 10% federal income tax penalty.

Earnings subject to federal income tax and any applicable state/local income tax. In addition, a 10% federal income tax penalty.

None, as long as the funds are being used for the benefit of the minor.



Do you have to worry about over-funding a 529 college savings plan? 

It is a balancing act, and you may not want to over-fund a 529. If you have money left over, you can withdraw it for non-qualified expenses, but the earnings would be subject to ordinary income tax plus a 10% penalty. 529s allow for left over funds to be transferred to another child’s or qualified family member’s 529 account, tax and penalty fee. This includes yourself, assuming you are a qualified family member, for which you could use the funds for any qualified education expense.

One approach to avoid over-funding a 529 is to split contributions between 529s and custodial accounts. The 529 could be used for qualified education expenses while a custodial account could be used for non-qualified education expenses. In general, funding the 529 should be of higher priority because of the tax-free growth opportunity. 


Blackburn_Bryan_circleBryan Blackburn, CFP® serves as Financial Planner and Wealth Advisor at Carnegie Investment Counsel. As a CERTIFIED FINANCIAL PLANNER™, he manages relationships for select clients. Bryan provides holistic financial planning advice; including retirement planning, cash flow analysis, tax planning, education funding, and estate planning and investment analysis.


*Information provided is accurate as of the date of this publication.


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