How to invest consistently for your children’s education

We all know that college expenses are on the rise and that student debt in the United States can be crippling for some borrowers. These days, it’s possible to spend as much on our child’s education as we do the roof over our heads – next to our homes, a college education may be the largest investment we make in our lifetimes. And it’s only getting more expensive: according to CollegeBoard, for the college year 2024–2025, the average published tuition and fee price is “1.46 times as high as it was 30 years ago at public two-year colleges, 2.02 times as high as it was 30 years ago at public four-year institutions and 1.75 times as high as it was 30 years ago at private nonprofit four-year institutions, after adjusting for inflation.” Increasing costs leave many students with student loan debt after college, with the average debt for the American borrower being $37,853.

The big question for many parents with children bound for higher education is, rightfully: What can I do about it? As parents, we’ve been shouldering our children’s burdens and helping them walk their best possible life path since the day they were born. Of course, we want to help shelter them from the crushing weight of student debt. But, we have to do it the right way.

Familiar strategies for consistent investing

The truth is, investing for your children is a lot like investing for yourself. Perhaps you noticed that saving for retirement became so much more popular when you were able to automate your contributions? When we can “set it and forget it” with contributions toward our bigger financial goals going immediately into a separate investment account, we’re removing human error from the equation – there’s no way to simply forget this month’s contribution when it’s already set to happen.

Enter the 529. These tax-advantaged accounts have long been a popular approach when planning for college, and for good reason. When you open your account, you can set up automatic contributions that will move money directly from your checking or savings accounts into your 529.

You’ll see even more familiar strategies at play when it comes to exactly how to invest your money in a 529 – most 529 plans offer “year-of-enrollment funds,” which function exactly like target-date funds for retirement. The asset allocation automatically adjusts based on the expected year of enrollment. So, these funds will take more risk when your child is younger and less risk as they approach their time to leave the nest and head to college.

Options outside of a 529

You’ll sometimes hear mutual funds cited as a vehicle to invest for college. With this option, you’ll have a variety of funds to choose from, and you can carefully select one that meets your specifications for risk tolerance and time horizon. But it’s only with a 529 that you’ll receive tax benefits: whenever you take the money out, as long as you’re paying for a qualified educational expense, there are no federal taxes due and generally no state taxes due.

Additionally, many states offer state tax deductions for 529s. The same can’t be said of a mutual fund. Plus, friends and family can give large contributions to a child’s 529 plan without incurring gift tax. While in 2025, the typical gift tax exclusion is limited to gifts of $19,000 or less, an individual can contribute up to $95,000 in a 529 plan (a married couple filing jointly can gift up to $190,000) if they use the five-year gift tax averaging at the election of the donor, which means the contributions will be treated as if they were spread evenly over a five-year period and will therefore be tax-free. This option is popular with grandparents seeking to gift for their grandchildren’s education while taking assets out of their taxable estate.

Also, although 529 plans have limits, most families never run into them and would rarely need more than the maximum allowed. Limits vary by state and range from $235,000 to $597,000.

Surprising benefits, risks and pitfalls of 529s

Yes, as with most investment accounts, there are fees. Keep a close eye on these as you’re choosing a plan. You might be looking at a mix of annual fees, account maintenance fees and administrative fees. Make sure you always read the fine print, as not all plans are created equal. Speak to your advisor about a list of the 529 plans you’re considering before you pull the trigger. (And while you’re studying the fine print, note that some plans require a minimum deposit for opening, so make sure you’ve got cash on hand before you start the account creation process.)

If your child elects not to go to college or vocational school, or gets a scholarship, all the money you accumulated is still yours. You can transfer it to another child or family member – even yourself. (Maybe it’s time for that MBA or MFA you’ve been pondering.) Another option is to roll over up to $35,000 into a Roth IRA for the 529 account beneficiary without penalty. Just keep in mind that if you make any non-qualified withdrawals for non-education-related expenses, you’ll have to pay taxes on any investment gains plus a 10% penalty. Even if your child gets a scholarship, they might still need the money you’ve accumulated to cover additional expenses, like housing, a study abroad experience or any other costs that aren’t fully covered by their scholarship.

It’s also important to note that the money you accumulate in a 529 could potentially affect your child’s financial aid. The balance of your child’s 529 will be taken into account as part of your “expected family contribution.” However, while this is true, it’s important to note that a family’s annual income (including the student’s) counts more against financial aid than any savings and investments, especially when they’re held in the parents’ names. It’s important to talk to your financial advisor – especially as your child’s college years approach – to understand all the implications of your account and walk through your optimal withdrawal strategies.

Doing as much as you can, as soon as you can

While your desire to help your children manage their college costs may be strong, you should still consider prioritizing your own retirement and other investing goals first. Whatever you’re able to set aside for them is truly a gift. Speaking of which, an added benefit to opening a 529 is that relatives, grandparents and friends can easily contribute to the account for birthdays and holidays. Consider talking to an advisor to discuss whether a 529 plan may be right for you and your child.

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