The rising cost of higher education presents a challenge for many families. The good news: with thoughtful planning and the smart use of available tools, these costs can become much more manageable. For parents and grandparents who want to support education goals, understanding the different savings vehicles and tax benefits is key.
529 College Savings Plans
A 529 plan is often the cornerstone of college savings. These state-sponsored accounts grow tax-deferred and allow tax-free withdrawals for qualified expenses such as tuition, fees, books, supplies, and even room and board. In 2025, you can contribute up to $19,000 per beneficiary each year without triggering gift taxes or $38,000 for couples.1
Some families implement a “front-loading” strategy, contributing up to $95,000 at once or $190,000 for couples using the five-year gift election.2 While the hope is to jumpstart growth, it also means no further gifts can be made for that beneficiary during the next five years without tax consequences.
As an added bonus, many states provide an income tax deduction or credit for contributions to their in-state plan.
Coverdell Education Savings Accounts
Coverdell ESAs provide broader flexibility, covering not only higher education but also K–12 expenses like tutoring and supplies. Contributions are capped at $2,000 annually per beneficiary, and income limits apply, up to $95,000 MAGI for single filers and $190,000 for joint filers in 2025.3 While smaller in scale, they can work well alongside a 529 plan.
Custodial Accounts (UTMA/UGMA)
Like a 529 plan, you can contribute to Custodial accounts, but unlike 529s, these allow unlimited contributions and can be used for education or other expenses. Earnings are usually taxed at the child’s rate. However, funds transferred to the child can reduce financial aid eligibility because they count as student assets. The assets will become the child’s property once it reaches the age of majority.4
Education Tax Credits
Education credits are another valuable tool. These also have income limits, up to $90,000 MAGI for single filers and $180,000 for joint filers in 2025, but for those who qualify, the American Opportunity Tax Credit (“AOTC”) provides up to $2,500 per student per year for the first four years of college, while the Lifetime Learning Credit (“LLC”) offers up to $2,000 per tax return for ongoing education.5 Note that you can’t “double-dip” - if you use 529 withdrawals for tuition, you can’t also claim those same tuition expenses for a tax credit.
Comparing College Funding Options
Pulling It Together
There is no single “best” way to pay for college – it depends on your family’s situation. Whichever strategy works best for you, the most important thing is to start early – even small, regular contributions can make a significant difference over time. Grandparents, too, may want to contribute to a college savings account, or find estate planning opportunities in direct tuition payments or trust structures.
At Carnegie, we help families evaluate these options within the bigger picture of financial planning. With the right strategy in place, college costs become more manageable, helping you approach them with clarity and confidence.
[1] Christian, Rachel. "529 plan contribution limits for 2025: What college savers need to know." Bankrate. February 10, 2025. https://www.bankrate.com/investing/529-annual-contribution-limits/.
[2] “How Grandparents Can Help Fund Education,” Fidelity. November 26, 2024. https://www.fidelity.com/learning-center/personal-finance/college-planning/grandparents-can-help-fund-college.
[3] “Publication 970 (2024), Tax Benefits for Education | Internal Revenue Service,” n.d. https://www.irs.gov/publications/p970#en_US_2024_publink1000178398.
[4] Shillan, Jacy. “UGMA & UTMA Custodial Accounts - Finaid.” Finaid, May 26, 2020. https://finaid.org/savings/ugma/.
[5] “Education Credits: Questions and Answers | Internal Revenue Service,” n.d. https://www.irs.gov/credits-deductions/individuals/education-credits-questions-and-answers.
This commentary is for informational and educational purposes only. Opinions are subject to change.
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