Planning for Your Child's College Costs: What Nobody Really Explains

The short answer

A 529 plan and student loans work together, not against each other. A 529 grows tax-free for education costs, so the earlier you open one, even at $25 a month, the less your child has to borrow. If loans become necessary, use federal loans first, understand the repayment terms before signing, and borrow only what you actually need.

Hey everyone,

I want to talk about something that stresses out just about every parent I know: paying for college.

Tuition keeps climbing, the "average" cost of a four-year degree sounds like a mortgage, and most parents I talk to feel like they're supposed to just figure it out on their own. So I wanted to break down two of the biggest tools in this conversation, 529 accounts and student loans, in plain language, because I think the confusion around them is exactly the kind of knowledge gap I talked about in my last post.

What is a 529 plan, and what are the pros and cons?

A 529 plan is a savings account built specifically for education costs. You put money in, it grows over time (usually invested in something like mutual funds), and when your child is ready for school, you pull the money out tax-free as long as it's used for qualified expenses: tuition, room and board, books, even some K-12 costs depending on your state.

The benefits:

• Tax-free growth. Any investment gains inside the account aren't taxed when withdrawn for education. That compounding adds up significantly over 10-18 years.
• State tax deductions. Many states let you deduct contributions from your state income taxes, which is essentially free money depending on where you live.
• Flexibility. If your child gets a scholarship, doesn't go to college, or you have another kid, most plans let you change the beneficiary or roll unused funds into a Roth IRA (up to a $35,000 lifetime limit, and only if the account has been open at least 15 years).
• Anyone can contribute. Grandparents, aunts, uncles, family friends: anyone can put money into the account, which makes it a great gift option for birthdays and holidays instead of another toy that'll be forgotten in a month.

The costs/downsides:

• Penalties for non-qualified withdrawals. If you pull money out for something that isn't education-related, you'll owe income tax plus a 10% penalty on the earnings.
• Investment risk. Like any investment account, the market can go down. If you need the money right when the market dips, that's a real risk, which is why many families shift to more conservative investments as college gets closer.
• It requires starting early. A 529 works best when you have years of compounding on your side. Opening one when your child is 16 doesn't give you nearly the same benefit as opening one at birth.

What are the pros and cons of student loans?

Student loans get a bad reputation, and in a lot of cases, that reputation is earned. But they're not inherently evil. They're a tool, and like any tool, the outcome depends on how they're used.

The benefits:

• Access. Loans allow students to attend schools they otherwise couldn't afford upfront, which can open doors to better opportunities and higher lifetime earnings, depending on the field.
• Federal loans have real protections. Income-driven repayment plans, deferment options, and (for public service workers) forgiveness programs can make federal loans far more manageable than people assume.
• Building credit. Responsibly managed, student loans are one of the first ways young adults build a credit history.

The costs:

• Interest compounds against you. Unlike a 529, where growth works in your favor, loan interest works against you. A loan that isn't paid down can balloon significantly over a decade.
• Private loans often lack protections. Unlike federal loans, private student loans usually don't offer income-driven repayment or forgiveness options, and the interest rates can be much higher.
• It follows you. Unlike almost any other debt, student loans are notoriously difficult to discharge, even in bankruptcy. This is why I always encourage people to treat the amount borrowed as seriously as they would a car loan or a mortgage.

Should you use a 529, student loans, or both?

These two tools aren't opposites — they usually work together. A 529 account reduces how much you'll eventually need to borrow, and understanding how loans work protects your child from taking on more debt than necessary once they get there.

If you're a parent right now, my honest advice is this: open a 529 as early as you can, even if it's just $25 a month. Small, consistent contributions compounding over 18 years will do more heavy lifting than you'd expect. And if loans do become part of the picture, prioritize federal loans first, understand the repayment terms before signing anything, and borrow only what's actually needed — not the full amount offered.

This is exactly the kind of information I believe should be taught in schools, not something families have to stumble into figuring out on their own. Until that changes, that's what Learn to Love Money is here for.

More on this soon,
Learn to Love Money