Everyone knows college is expensive. But how you choose to pay for it—especially which dollars you use and in what order—can have long-term consequences that extend well beyond the college years.

This year, the average tuition and fees for a private college are nearly $45,000 per year, and for some schools the total cost of attendance can be significantly higher. The good news is that many families don’t end up paying the full sticker price. Grants, scholarships, and financial aid packages can help reduce costs. But once those are factored in, an important question remains:

Where should the rest of the money come from?

This post focuses on practical college‑funding decisions for mass‑affluent families. In a follow‑up post, we’ll address how higher‑net‑worth families approach education funding from an estate and gift‑planning perspective.

Consider All Your Options

First, take stock of the possible funding sources available to you. Each comes with distinct trade-offs that matter differently depending on wealth level, tax exposure, and time horizon. These may include 529 college savings plans, taxable brokerage accounts, traditional savings accounts, cash from current income, gifts from family members and loans. Each come with their own rules and tax treatment. And which sources you tap—and in what order—matters.

• 529 plan: Contributions to a 529 college savings plan grow tax-deferred. Withdrawals are tax-free when they’re used to cover qualified education expenses—anything else will likely come with an income tax hit and a 10% penalty on the earnings portion of the withdrawal. The good news is that qualified education expenses cover more than just tuition. You can use tax-free withdrawals to pay for room and board, textbooks, computers and more. One important note: 529 plans owned by parents are treated as parental assets and may reduce financial aid awards.
• Brokerage account: When you sell assets to make a withdrawal from a brokerage account, any profit is subject to capital gains tax. Long-term capital gains are taxed at preferential rates, but even so, brokerage account funds are generally less tax-efficient than 529 plans in covering education expenses. Your brokerage account balance is also factored into financial aid eligibility.
• Savings account: Interest earned on a savings account is taxed as ordinary income. Withdrawals don’t create taxable events. Like brokerage accounts, savings accounts can reduce financial aid eligibility, more so if held by the student.
• Current income: Making payments from your income doesn’t offer a direct tax advantage, but it can help you avoid tapping into accounts you’d rather not touch. Income is a major factor in financial aid determinations.
• Gift from a family member: Family members can gift up to $19,000 ($38,000 for married couples) per recipient in 2025 and 2026 with no tax consequences. Gifts received can affect financial aid if they’re deposited into an account owned by the student or a parent. Family members can also pay tuition directly, avoiding the annual gift tax exclusion limit and any impact on financial aid decisions for students and parents.
• Student loans: Parents have access to student loans in the form of Federal Direct Parent Plus Loans and private student loans, both of which can help bridge the gap when savings, income and other resources aren’t enough. Federal loans may offer lower interest rates than private loans. As a parent, you can deduct up to $2,500 in student loan interest from your taxes every year.

Conventional Wisdom—and Where It Breaks Down

As a rule of thumb, families should first take advantage of any “free” money such as scholarships and grants before deciding which source of funding to draw from. Next, consider drawing from taxable accounts before tapping into tax-deferred accounts. The goal here is to let your tax-deferred assets grow as much as possible so they can take advantage of the miracle of compound growth. When these sources of income are exhausted, you may turn to federal or private student loans, which charge interest and can therefore be the most expensive way to pay for college.

Of course, rules of thumb are broad—and they often break down for families with significant assets, concentrated wealth, or long planning horizons. The strategy that works for one family may not work for yours. That’s where we can help. Together, we can examine your complete financial picture to come up with a withdrawal plan that aligns with your situation and helps keep you on track toward your long-term goals. For instance, it may make more sense to take 529 withdrawals first if your taxable accounts are likely to trigger short-term capital gains, which are taxed at a much higher rate than long-term gains.

The American Opportunity Tax Credit is another factor to consider. Your tuition payments may qualify you for a maximum tax credit of $2,500, but any expenses covered from a 529 plan don’t count toward the tax credit. Making sure you pay tuition bills from more than your 529 can help ensure you maximize the “free” money from the tax credit. At the same time, the size of the credit phases out for higher earners, which can change the calculus depending on your income.

Avoid Touching Your Retirement Savings

Securing your retirement is fundamentally more important than funding college. That’s because college is something that can be financed with loans if needed. Retirement is not.

Your best bet is to steer clear of using funds from your 401(k) or IRA accounts. While there is a provision allowing penalty-free withdrawals from IRAs for education expenses, it’s generally not worth it to make them. Withdrawing early from a retirement account can mean sacrificing years of tax-advantaged growth. And because these accounts are subject to annual contribution limits, the amount you withdraw can’t always be replaced quickly.

There are many different factors to consider and weigh when designing a college payment strategy. Fortunately, you don’t have to wade through them alone. If you’re wondering about ways to pay for college, reach out and we’ll help you find the approach that’s best for you.