While saving for college is a great way to prepare for your child’s future, it can also penalize you when it comes time to apply for financial aid.
The Free Application for Federal Student Aid (FAFSA) form is used by most institutions to calculate aid. It takes into account college savings and adjusts amounts accordingly.
MassLive spoke with Mark Kantrowitz, a financial aid expert, about the tricks and tips he has for how to balance receiving the most financial aid while still putting aside money to pay for higher education expenses.
“The more you save, the more flexibility you’ll have, the more options you’ll have. So every dollar you borrow will cost you about $2 by the time you repay the debt,” he said.
Saving for college is especially important as tuition in Massachusetts has surged to nearly $100,000 per year at some elite institutions and student loans have become riskier and more expensive under President Donald Trump’s “One Big Beautiful Bill.”
Families should seek advice of financial planners to help with specific advice for their own situations.
Meanwhile, here are the four things to know about when saving for college in 2025.
Your own retirement account might be your kids’ best college savings vehicle
Retirement accounts such as 401(k), 403(b) or Roth IRA accounts are one surprising strategy for how to save for your child’s future.
While you won’t be able to use the money saved in retirement accounts to pay for college right away, the money can be used to pay back loans in the future when the parent reaches the eligible age of 59 and a half.
However, it is essential to remember that money taken out prior to the account-holder turning 59 and a half years old comes with a steep penalty — often 10% — which is the risk of using this strategy. Account holders also have to have had the retirement account for at least five years.
Retirement accounts are one good option because anything that is saved in those accounts won’t be counted as income under FAFSA, the federal financial aid form, because they’re not reported on federal income tax returns, according to Kantrowitz.
Contributions to an IRA do count as untaxed income on the FAFSA.
A benefit of using a retirement account as a college savings account is that even if a child doesn’t need the money or decides not to go to college, parents will still be saving for their retirement, Kantrowitz said.
You don’t have to be a parent to open a college savings account
Parents often save for their children’s college with a 529 account.
A 529 plan is an investment account that is tax-free when used for college and college-related expenses and K-12 education.
While a 529 plan will show up on a FAFSA form if it is created by a parent of a child, another family member — such as a grandparent or aunt — could create the investment account without it impacting the family income, Kantrowitz said.
However, if a grandparent dies and the money goes to the student’s parents, that will count toward their income.
While money saved in a 529 plan by a family member — who isn’t a parent — won’t show up in a family’s income, it will show up on a CSS Profile, which is an online application through the CollegeBoard that allows colleges to distribute non-federal institutional aid. As such, it may reduce the students’ total financial aid offered if a significant amount of money has been saved in a 529 plan, Kantrowitz said.
Because only some colleges participate in the CSS Profile, the potential impact on the student’s financial aid offer may not be something that your family has to think about.
Trump’s “Big Beautiful Bill” changed 529 plans by increasing the cap of $10,000 annually for K-12 tuition to $20,000 and additional uses were included.
The set of qualified expenses for 529 plans will now also include not just savings for tuition and fees but also book supplies and equipment, tutoring and standardized test fees, among other options.
Workforce education programs and post-secondary credentialing expenses will also be a part of the 529 plan.
Expenses that aren’t qualified would be taxable.
Kantrowitz suggests parents open a retirement account and a 529 plan in order to save for college to be able to pay throughout the degree and for any loans after.
While Trump’s “Big Beautiful Bill” has restricted how much people can borrow and completely eliminated some repayment plan options, Kantrowitz said 529 plans and retirement accounts aren’t something he is worried about as a long-term investment.
While a lot has changed this year already with student loans and savings, there is half a trillion dollars invested in 529 plans and $48 trillion in retirement accounts, he said.
“Congress would be fools to change the law. That doesn’t mean they won’t, but there are a lot of powerful financial interests who would oppose any changes,” Kantrowitz said.
Consider U. Plan or U. Fund in Massachusetts
Massachusetts has its own 529 plan, also known as U. Fund, which surged in popularity last year.
In 2024, 36,485 signed up for new accounts, raising the total to more than 285,000. Compared to five years ago, the number of accounts has grown by 73%, according to Julie Shields-Rutyna, Massachusetts Educational Financing Authority’s senior director of college planning, education and training.
Part of its appeal comes from the reduction or elimination of taxes, but also its multi-purpose spending options, Shields-Rutyna told MassLive last year.
Money in the U. Fund can be spent on things like college tuition, food and housing, books, supplies and equipment.
It can also be used for accredited vocational and career training schools, K-12 tuition instead of college or to pay off a student loan. Funds can be transferred to another member of the family.
Massachusetts residents can also claim a state income tax deduction when saving through a U. Fund account.
Another unique college savings fund the Massachusetts Educational Financing Authority offers is the U. Plan.
The plan allows family members to lock in a tuition price today for a student who will go to certain Massachusetts colleges in the future.
The idea behind the plan is that tuition prices have often increased at a rate beyond what most investment accounts’ returns would be.
Paying 10% of a year at a college now would still be considered paying 10% of the year at the time when the child goes to school years later, even if by then the costs have significantly increased.
There is a list of colleges that have agreed to be part of the U. Plan, ranging from state institutions to private institutions.
If the child decides they don’t want to go to any on the list, the funds can be transferred to another child or cashed out. Funds can only be used for tuition and fees.
People can have U. Fund and U. Plan accounts to serve different purposes for college saving.
Think ahead about where to apply and how many loans to take on
No matter what, parents should use a financial aid calculator for each school their child plans to apply to, often available through individual college websites. It is important to play “what if games” to determine how their money might impact financial aid eligibility before placing money in any account, Kantrowitz said.
Students should also apply to a variety of colleges — including a “financial aid safety school,” which is a college the student can afford even if they don’t get any financial aid, according to Kantrowitz.
In order to minimize debt, the total student loan debt at graduation should be less than the student’s annual starting salary. If that is the case, the student should be able to afford to repay their loans in 10 years or less, he said.
“Don’t choose the most expensive college in the country just because it’s the most expensive. You can get a perfectly fine college education at an in-state public college, which will cost you a quarter to a third the price of a private college,” Kantrowitz said.
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