Planning for a child or grandchild’s education is one of the most meaningful financial goals many families face. With rising tuition costs, inflation concerns and complex tax rules, it’s important to understand your options and develop a thoughtful, tax-efficient strategy that aligns with your broader financial plan.
An initial first step is to consider alternative educational paths that may better align with a student's goals, skills, and interests. Options like gap year programs, vocational schools, and trade certifications can offer hands-on experience, career readiness, and significantly lower costs compared to traditional four-year colleges. These paths are increasingly valued in today’s workforce and can lead to well-paying, in-demand careers without the burden of excessive student debt. Rather than assuming college is the only next step, students should be encouraged to explore what path best fits their aspirations and strengths—finding the right next step, not just the expected one.
Once the path is identified the next step is to work out the funding options. Below, are several funding strategies and considerations to help you make informed decisions.
Gifting Toward Education
Gifting is a powerful way to support a student’s education expenses while taking advantage of valuable tax benefits. In 2025, individuals can gift up to $19,000 per year (or $38,000 for married couples) without triggering the gift tax or using their lifetime exemption. These gifts can be contributed directly to the student, or to an account such as a custodial account, trust, or 529 plan.
It’s worth noting that payments made directly to an educational institution for tuition are not considered taxable gifts and do not count against your annual exclusion or lifetime exemption. This is an excellent strategy for grandparents and extended family members looking to help cover tuition costs in a tax-efficient way.
Understanding Financial Aid Impact
When evaluating college funding strategies, it’s essential to consider how different assets and income sources affect financial aid eligibility. The FAFSA (Free Application for Federal Student Aid) assesses both parent and student-owned assets. Generally, student-owned assets—such as UTMA/UGMA accounts—have a greater impact on financial aid eligibility than those owned by parents.
Interestingly, assets held in grandparent-owned 529 plans may not be counted at all under the current FAFSA rules. However, distributions from these accounts could be treated as income to the student, depending on timing. Similarly, trust distributions are usually treated as student income, which can also reduce aid eligibility.
Partnering with a financial advisor, alongside your tax professional or a financial aid consultant, can help you avoid unintended impacts and tailor a strategy to your specific situation.
529 Plans
One of the most popular college savings accounts is a 529 plan. These accounts offer tax-deferred growth and tax-free withdrawals when used for qualified education expenses—including college, graduate programs, and up to $20,000 per year for K–12 tuition (as of July 2025). Additionally, up to $10,000 (lifetime limit) may be used to repay student loans.
While there are no annual contribution limits, federal gift tax rules apply, and each state sets a lifetime contribution cap (generally between $400,000 and $550,000 per beneficiary). Some states also offer tax deductions or credits for contributions to their state-sponsored 529 plans.
If planning for multiple children or grandchildren, you can transfer unused funds to a sibling, cousin, spouse, parent, or even future generations. This makes the account a multi-generational education planning tool and avoids penalties on unused funds. You may also rollover 529 plan assets to ABLE accounts, designed for individuals with disabilities.
As of January 2024, a new provision under the SECURE 2.0 Act allows certain 529 plan assets to be rolled over into a Roth IRA for the beneficiary—offering more flexibility and long-term planning potential. However, there are strict eligibility requirements, so professional guidance is essential when considering this strategy.
As of July 2025, a new provision under the One Big Beautiful Bill Act (OBBBA) expanded qualified education expenses to include things like books and materials, testing fees, tutoring, online education materials, etc. It also expanded uses for postsecondary credentialing expenses such as vocational training and certifications.
Custodial Accounts (UTMA/UGMA)
UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) are custodial investment accounts that allow adults to gift assets to a minor. These funds can be used for any expense that benefits the child, including education. While grantors retain control until the child reaches the age of majority (typically 18–21, or up to 25 in some states), the assets become the child’s upon reaching that age. In Virginia, the age of majority is 18, but may be delayed up to age 21 with a delayed transfer provision.
One benefit of these accounts is flexibility. However, keep in mind that if the grantor also acts as custodian, the account’s value may be included in their taxable estate, which could present estate planning concerns. Additionally, assets in these accounts are owned by the student for FAFSA purposes, which can reduce financial aid eligibility more than parent-owned assets.
Trusts for Education
For families seeking greater control or custom provisions, irrevocable trusts can be an effective planning tool. These accounts can be tailored to include provisions for educational expenses and can offer tax and estate planning advantages. Trusts must be carefully drafted and administered in accordance with state and federal law. It’s important to consult both a financial advisor and an estate planning attorney to determine if a trust is appropriate for your goals.
Scholarships
Scholarships can significantly offset the cost of higher education and are available through many sources, including colleges/universities, non-profits, foundations and private organizations. Common types include:
- Merit-based (academic or athletic performance)
- Need-based (based on family income)
- Field-of-study or career-specific
- Demographic or identity-based
- Community service and leadership-based
- Institutional scholarships offered directly by colleges
- Private and corporate-sponsored awards
Encourage students to start their search early and use reputable scholarship search platforms. Every dollar awarded is one less you’ll need to withdraw from savings or investable assets.
Using Parent-Owned Assets Strategically
College planning should always be considered within the context of your broader financial goals. Assets such as brokerage accounts, Roth IRAs, and even cash value from life insurance policies may be strategically used to help cover education costs. The key is understanding how distributions from these accounts impact taxes, retirement savings, and financial aid eligibility.
This is where financial planning becomes essential. It’s important to evaluate how these resources fit into the larger picture—balancing short-term needs with long-term goals.
Final Thoughts
Every family’s education funding strategy is unique, and it’s important to coordinate savings, gifting, financial aid, and tax-efficient strategies to build a solution that works for you. Whether you’re planning for a young child or navigating tuition bills right around the corner, we’re here to help guide you through the process.
Resources:
https://www.jpmorgan.com/insights/wealth-planning/education-planning
https://www.schwab.com/learn/topic/education/1