Saving for College: 529 Plans, FAFSA, and Financial Aid
Billions in aid go unclaimed every year — don't leave money on the table
The College Funding Reality
Here's what most families don't realize:
Billions of dollars in grants and aid go unclaimed every year because families don't complete the FAFSA or don't understand their options.
College funding isn't just about saving more — it's about being strategic with timing, account types, and aid applications.
The College Funding Equation
| Total Cost | = | Sticker Price | - | Grants & Scholarships | - | Your Savings | - | Work/Loans |
|---|
Key insight: "Sticker price" is NOT what most families pay. The net price (after aid) is what matters.
| School Type | Average Sticker Price | Average Net Price (with aid) |
|---|---|---|
| Public in-state | ~$23,000/year | ~$15,000/year |
| Public out-of-state | ~$40,000/year | ~$27,000/year |
| Private | ~$54,000/year | ~$33,000/year |
Many private schools that look unaffordable have more generous aid than public schools.
529 Plans: The Tax-Advantaged College Account
What Is a 529 Plan?
A tax-advantaged savings account specifically for education expenses.
| Feature | Details |
|---|---|
| Contributions | After-tax (no federal deduction), but some states offer state tax deductions |
| Growth | Tax-free |
| Withdrawals | Tax-free if used for qualified education expenses |
| Control | Parent maintains control (unlike custodial accounts) |
| Financial aid | Counts as parent asset (~5.6% weight) — much better than student asset |
Qualified Expenses
529 money can be used tax-free for:
- ✅ Tuition and fees
- ✅ Books and supplies
- ✅ Computers and equipment required for enrollment
- ✅ Room and board (if enrolled at least half-time)
- ✅ K-12 tuition (up to $10,000/year)
- ✅ Apprenticeship programs
- ✅ Student loan repayment (up to $10,000 lifetime)
What If They Don't Go to College?
This used to be the big fear with 529s. But now:
| Scenario | What Happens |
|---|---|
| Child doesn't go to college | Change beneficiary to another family member (sibling, cousin, even yourself) |
| Leftover funds | Roll up to $35,000 into a Roth IRA (after account has been open 15+ years — SECURE 2.0 Act) |
| Non-qualified withdrawal | Pay taxes + 10% penalty on earnings only (contributions were already after-tax) |
Bottom line: The risk of "wasted" 529 funds is much lower than most people think.
FAFSA: Don't Skip This
What Is FAFSA?
The Free Application for Federal Student Aid — the gateway to:
- Federal grants (Pell Grant — free money)
- Federal student loans (better terms than private)
- Work-study programs
- Many state and institutional aid programs
The Big Changes: FAFSA Simplification Act
Starting with the 2024-25 school year, FAFSA was significantly simplified:
| Old FAFSA | New FAFSA |
|---|---|
| 108 questions | ~36 questions |
| Complex formulas | Simplified SAI (Student Aid Index) |
| "Sibling discount" for multiple kids in college | Eliminated |
| Prior-prior year income | Still uses prior-prior year |
Important: The elimination of the sibling discount means families with multiple kids in college at the same time may receive less aid than before.
FAFSA Timeline
| Date | Action |
|---|---|
| October 1 | FAFSA opens (for following fall enrollment) |
| As soon as possible | Submit FAFSA — some aid is first-come, first-served |
| State deadlines | Vary — some as early as February |
| Federal deadline | June 30 (but don't wait this long) |
Income Timing Matters
FAFSA uses "prior-prior year" income. For fall 2027 enrollment:
- FAFSA opens October 2026
- Uses 2025 tax returns
Planning opportunity: If a parent has a high-income year, the impact won't hit FAFSA until 2 years later. Families can sometimes time income strategically.
Financial Aid Types
Free Money (Don't Repay)
| Type | Based On | Notes |
|---|---|---|
| Pell Grant | Need (FAFSA) | Up to ~$7,400/year (federal) |
| Institutional grants | Need and/or merit | From the college itself |
| State grants | Varies | Check your state's program |
| Scholarships | Merit, demographics, interests | External and institutional |
Earned (Work for It)
| Type | Notes |
|---|---|
| Work-study | Part-time campus job, wages paid directly to you |
Borrowed (Must Repay)
| Type | Interest Rate | Protections |
|---|---|---|
| Federal Direct Loans | Fixed, relatively low | Income-driven repayment, forgiveness programs, deferment |
| Parent PLUS Loans | Fixed, higher than student | Limited protections |
| Private Loans | Variable, depends on credit | Few protections, avoid if possible |
Rule of thumb: Exhaust federal options before considering private loans.
The Net Price Calculator Hack
Every college is required to have a Net Price Calculator on their website.
What it does: Estimates your actual cost after aid, based on your family's finances.
How to use it:
- Google "[College Name] net price calculator"
- Enter your financial info
- Get an estimate of grants and your true cost
Why this matters: A $60,000/year private school might cost you less than a $25,000/year public school after aid. You won't know until you calculate.
What ISP Teaches
The College Funding Planning Challenge
ISP students work through:
- Research — Use net price calculators for 3-5 schools of interest
- FAFSA Prep — Understand what info is needed and when
- Scholarship Search — Identify 5+ potential scholarships to apply for
- Timeline — Create a family college funding timeline
- Teach — Create a "You Teach" explaining something you learned
For Athletes
College-bound athletes should also understand:
- Athletic scholarships — Full rides are rare except in football/basketball
- Academic + athletic — Many athletes combine partial athletic with academic/need-based aid
- NIL — Now a factor in college selection
- Division levels — D1, D2, D3, NAIA all have different aid rules
Common College Funding Mistakes
| Mistake | Why It's a Problem | What to Do Instead |
|---|---|---|
| Skipping FAFSA | Leaves free money on the table | File FAFSA even if you think you won't qualify |
| Only looking at sticker price | Misses schools that could be affordable | Always calculate net price |
| Saving in child's name | Hurts financial aid (20% vs 5.6%) | Use 529 or parent accounts |
| Not comparing aid offers | Schools package aid differently | Compare net costs across offers |
| Taking max loans offered | You don't have to take it all | Borrow only what you need |
| Ignoring state schools | Often excellent value | Include at least one "safety" state school |
The 529 → Roth IRA Rollover (SECURE 2.0)
Starting in 2024, unused 529 funds can be rolled into a Roth IRA:
| Requirement | Details |
|---|---|
| 529 must be open 15+ years | Plan ahead |
| Lifetime max of $35,000 | Total rolled, not per year |
| Subject to annual Roth contribution limits | ~$7,000/year (2024) |
| Beneficiary must have earned income | Standard Roth rule |
Why this matters: If you oversave in a 529, the money isn't stuck — it can become retirement savings.
FAQ
Q: Should I save for college or retirement first?
A: Generally, retirement first. You can borrow for college but not for retirement. However, if you have extra capacity, 529s are valuable.
Q: My family makes too much for financial aid — should I skip FAFSA?
A: No. Some aid (institutional, merit, loans) requires FAFSA regardless of income. It costs nothing to file.
Q: What's better: 529 or Roth IRA for college savings?
A: 529 is designed for education and offers better tax treatment for that purpose. Roth IRA offers more flexibility (can be used for anything) but contributions are limited to earned income.
Q: Will a 529 hurt my financial aid?
A: A parent-owned 529 is counted at ~5.6% — meaning $10,000 saved reduces aid by ~$560. This is much better than student-owned assets (20%).
Q: What if my child gets a full scholarship?
A: You can withdraw 529 funds equal to the scholarship amount without penalty (though earnings would be taxable).
Related Topics
- Roth IRA for Teens → — Alternative/complement to 529
- Investing for Minors → — Custodial account considerations
- Your First Job → — Earning to contribute
- Personal Finance Overview →