Paying for college without derailing your retirement
Most families ask the same five questions in the same order: Is college still worth it? What does it really cost? What just changed? How do families pay for it? And, for parents and grandparents of very young children, what happens if the funding clock starts at age one instead of age fifteen? This article walks through all five.
What college actually costs in 2025-26
The College Board publishes an average total cost of attendance each year: tuition, fees, housing, food, books and personal expenses. For 2025-26 the published student budgets are:
- $21,320 at a public two-year college (in-district)
- $30,990 at a public four-year college (in-state)
- $50,920 at a public four-year college (out-of-state)
- $65,470 at a private nonprofit four-year college
Sticker price is not the whole story. After grants, scholarships and education tax benefits, the average net cost for an in-state student at a public university was about $21,340. But that average is pulled down by lower-income families who qualify for need-based aid, and that aid phases out quickly as income rises. For most of the families we work with, we plan against the published cost, not the net average.
A second number is more useful for planning. Sallie Mae and Ipsos report that families spent an average of $34,019 on college in 2025-26, up 10% from $30,837 the year before. Of that, $16,624 came straight out of parent and student income and savings; grants and scholarships covered 27% and borrowing covered 22%. The out-of-pocket half is the number your plan has to solve for.
What just changed: the aid formula
The FAFSA Simplification Act replaced the Expected Family Contribution with the Student Aid Index (SAI) starting in 2024-25. Six changes matter for most families:
- It can go negative. The SAI runs as low as −$1,500 (the old EFC stopped at zero), so more students qualify for the maximum Pell Grant.
- The sibling discount is gone. Two children in college at once used to split the parent contribution in half. It no longer does, a real hit to larger families.
- The asset protection allowance is gone. A slice of parent assets used to be sheltered based on age. That allowance is now $0, so all reportable assets enter the calculation.
- Grandparent-owned 529s no longer count. Distributions used to be reported as student income two years later. They no longer are, which opens a planning door for grandparents.
- Small businesses and farms now count. Assets that were excluded are now reportable, which can raise the SAI for self-employed families.
- It is still prior-prior year. The 2026-27 FAFSA uses your 2024 tax return. The financial decisions that shape aid are made two years before the tuition bill arrives.
What just changed: federal parent borrowing now has a ceiling
Until June 30, 2026, parents could borrow through Parent PLUS up to the school's full cost of attendance, minus other aid, with no cap. The One Big Beautiful Bill Act changed that. Effective July 1, 2026, Parent PLUS is capped at $20,000 per year per dependent student with a $65,000 lifetime cap per student, combined across both parents. Grad PLUS ended; graduate borrowing is capped at $20,500 a year and $100,000 total, professional programs at $50,000 and $200,000.
According to Sallie Mae, 53% of families do not know these caps exist. Here is what they leave uncovered, using published 2025-26 public in-state costs inflated at a conservative 5% a year:
- A student starting college today: roughly $133,571 projected four-year cost, less the $65,000 federal cap, leaves about $68,571 to fund another way.
- A child born this year: roughly $321,454 projected four-year cost, less the $65,000 cap, leaves about $256,454 to fund another way.
That gap gets filled by one of three things: private loans at whatever rate the credit market offers, a less expensive school, or money the family set aside years earlier. Only the third one is under your control today.
A legacy provision may preserve the old limits if a Parent PLUS loan, or the student's own Direct loan, was disbursed for the same program before July 1, 2026 and the student stays continuously enrolled. It lasts three academic years or until the program is completed. Confirm eligibility with the school's financial aid office.
Where you hold the money matters
Two families with identical net worth can produce very different Student Aid Index numbers, because the formula counts assets differently depending on who owns them:
| Where the money sits | Whose asset | Assessed at | Practical effect |
|---|---|---|---|
| Parent-owned 529 plan | Parent | Up to 5.64% | Counted, but at the gentler parent rate |
| Custodial account (UGMA/UTMA) | Student | 20% | The harshest treatment of any common vehicle |
| Coverdell ESA (parent-owned) | Parent | Up to 5.64% | Same treatment as a parent-owned 529 |
| Grandparent-owned 529 plan | Neither | Not reported | Distributions no longer count as student income |
| Retirement accounts (401k, IRA) | Neither | Not reported | Balances are excluded from the FAFSA entirely |
| Cash value life insurance | Neither | Not reported | Cash value is not a reportable FAFSA asset |
| Primary residence equity | Neither | Not reported | Excluded on the FAFSA; some CSS Profile schools count it |
None of this is a reason to choose a vehicle on aid treatment alone. It is a reason to know the treatment before you choose, and to remember that many private colleges use the CSS Profile, which counts things the FAFSA does not.
The four ways families fund it
Each vehicle is good at something. None is good at everything, and most families end up using more than one.
1. 529 College Savings Plan
Contributions grow tax-deferred and withdrawals for qualified education expenses are free of federal income tax. The account owner keeps control, the beneficiary can be changed to another family member, and under SECURE 2.0 up to $35,000 lifetime can be rolled into the beneficiary's Roth IRA once the account has been open 15 years. Trade-offs: non-qualified earnings face income tax plus a 10% federal penalty, the investment menu is limited, and market risk sits with you. Best fit: families confident the money will be used for education who want the cleanest tax treatment available.
2. Custodial account (UGMA/UTMA)
An irrevocable gift to a minor, managed by a custodian until the child reaches the age of majority, with no restriction on what the money is eventually used for and no contribution ceiling. Trade-offs: control passes to the child outright, it is assessed as a student asset at 20% (the harshest aid treatment), and unearned income above thresholds can be taxed at the parents' rate. Best fit: families who want maximum flexibility, are comfortable handing over control, and are not counting on need-based aid.
3. Coverdell Education Savings Account
Tax-deferred growth and tax-free qualified withdrawals, and unlike a 529 it can be used for elementary and secondary school as well as college. Trade-offs: contributions are capped at $2,000 per beneficiary per year from all sources, contributor income limits exclude many families, and funds must generally be used by age 30. Best fit: families with private K-12 tuition in the picture, usually as a supplement rather than the main plan.
4. Cash value life insurance (Indexed Universal Life)
A permanent policy funded well above the cost of insurance. Interest credited to cash value is linked in part to a market index, subject to a cap or participation rate, with a guaranteed floor (commonly 0%) so a negative index year credits zero rather than a loss. Cash value can be accessed through withdrawals to basis and policy loans, income-tax-free if the policy is structured and maintained correctly, and it is not a reportable FAFSA asset. The death benefit is in force from day one, which is the part no savings vehicle can replicate: if the parent dies, the funding plan completes itself. Trade-offs: costs of insurance and policy charges, surrender charges in the early years, caps that limit upside and can change, and it requires insurability and consistent funding over a long horizon. Best fit: families who can fund consistently for many years, want the money usable whether or not the child attends college, and want the plan protected if the earner is not there.
Side by side
| 529 Plan | Custodial (UGMA/UTMA) | Coverdell ESA | Indexed Universal Life | |
|---|---|---|---|---|
| Contribution limit | No federal cap; high state aggregate limits | No limit | $2,000 per beneficiary per year | No IRS cap, but IRC 7702 funding limits apply |
| Growth | Tax-deferred | Taxable to the child | Tax-deferred | Tax-deferred; indexed with a floor and a cap |
| Withdrawals | Tax-free if qualified | Taxable as realized | Tax-free if qualified | Tax-free via basis and loans if properly structured |
| Use restriction | Education only | None | Education only | None |
| FAFSA treatment | Parent asset, up to 5.64% | Student asset, 20% | Parent asset, up to 5.64% | Cash value not reportable |
| Who keeps control | Account owner | Child, at age of majority | Responsible individual | Policy owner |
| Market loss exposure | Yes | Yes | Yes | Indexed account has a floor, commonly 0% |
| If the parent dies | Balance only | Balance only | Balance only | Death benefit pays the plan out |
Simplified comparison for discussion purposes. Tax treatment depends on your circumstances and on the policy or plan meeting applicable requirements. This is not tax or legal advice; consult your own tax professional or attorney.
The Million-Dollar-Baby idea: starting at age one
For parents and grandparents of very young children, there is a version of the fourth vehicle built around time rather than size. A juvenile policy locks in insurability at its cheapest and healthiest, uses a small premium sized to be fundable for decades, is structured with a minimum death benefit and maximum funding to stay inside IRC Section 7702 limits, and gives two access windows: the college years and, later, retirement.
The whole argument is time, not magic. At $200 a month through age 20, a policy started at age 1 has $45,600 of premium paid over 19 years, with 17 years before college begins. The same policy started at age 15 has $12,000 paid over 5 years, with 3 years before college. Starting early puts in $33,600 more and buys fourteen more years for it to work before the first tuition bill. Those are premium dollars and elapsed years only; what a policy actually produces depends on funding, crediting and time, and only a current, NAIC-compliant illustration showing guaranteed alongside non-guaranteed values can answer that.
The honest version: what has to be true for this to work
- Insurability. The policy has to be issued. Juvenile underwriting is usually straightforward, but approval is never automatic.
- Consistent funding. Skipped or reduced premiums change every number.
- Illustrated rates are not guaranteed. Real index returns vary, and caps and participation rates can be changed by the carrier within contractual limits.
- Correct structure and maintenance. Tax-free access depends on staying within IRC 7702 limits, avoiding modified endowment contract status, and not lapsing with a loan outstanding.
- Time horizon. Early-year charges and surrender periods make this a poor fit if the money is needed back within a few years.
- It is not the only answer. For many families a 529 does the job with less complexity and better tax treatment on qualified expenses. Often the right plan uses both.
If an advisor shows you the upside without this list, ask for this list.
Where a family usually starts
- Put a number on it. Pick the schools you would actually consider and project the four- and five-year cost from your child's current age.
- Estimate where you stand. Run a Student Aid Index estimate on your prior-prior year return so you know what aid is realistic.
- Look at where the money sits. Review how your current savings would be counted and whether the ownership structure works for or against you.
- Choose the mix. Decide which combination of vehicles fits your income, your timeline and how much flexibility you want if plans change.
Sources: College Board, Trends in College Pricing and Student Aid 2025; Sallie Mae and Ipsos, How America Pays for College 2026; FAFSA Simplification Act and U.S. Department of Education Student Aid Index guidance; One Big Beautiful Bill Act (2025) and Department of Education guidance effective July 1, 2026; Internal Revenue Service Publication 970; SECURE 2.0 Act of 2022. Federal aid rules, loan limits and tax law are subject to change; confirm current rules at studentaid.gov. Cost projections are hypothetical, based on published 2025-26 budgets inflated at an assumed 5% per year, before any grant or merit aid, and are not predictions. This article is for general educational purposes only and is not individualized advice, tax advice or legal advice. Life insurance guarantees are based on the claims-paying ability of the issuing insurer; loans and withdrawals reduce cash value and death benefit and may be taxable if the policy lapses or is surrendered. Disability income insurance is not offered through MMT Financial and Insurance and is referred to an appropriately licensed specialist. Marc Merritt NY Lic LA-1010090 (since 2001) | Marylene Teopengco-Merritt NY Lic LA-1298496 (since 2017) | Licensed: NY, NJ, PA | Nationwide carrier appointments pending.