College Financial Tips for both Parents and Students

Kirk Kreikemeier |

It has been a couple years since we moved our children back to college.  There are many exciting and at times stressful things that must be planned.  Financial related topics may not be at the top your list right now, but it is sure to come up soon for both parents and students.  Here are a few tips for each.


Parents - Withdrawing Funds from 529 Savings Plan

If you have been diligent about saving for this day in a 529 savings plan, now comes the fun part – withdrawing the funds to cover the bills.  Here are some common questions with answers.  For general information on 529 plans see my past blog post.

What expenses can be reimbursed from a 529 Savings Plan?

  • Sources:  IRS Publication 970 or 529 Plan Document
  • Tuition, fees, books, supplies and equipment required by the school
  • Room and board (if enrolled at least half time); includes living off-campus, provided it is less than room/board rate school uses for cost of attendance
  • Purchase of computers and peripheral equipment, software and internet access provided software related to academic needs
  • No more than $10,000 to pay off student loans for 529 beneficiary or siblings (confirm your state plan allows – Illinois does)
  • NOT ALLOWED:  college application fees, transportation, insurance, sports/club/social fees, furniture/decorations.
  • NOTE:  if have a 529 PrePaid Plan that ONLY COVERS TUITION.

Where are the funds sent from the 529 Plan?

  • You request a withdrawal from 529 Plan (be sure to select “qualified expense”) and enter where you want funds to go; a few choices:
    • directly to school for tuition and room/board if on campus
    • to 529 owner (you!) for reimbursement or send to necessary party
    • directly to 529 beneficiary (the student) for any reimbursement
  • I personally had an ACH connection to my checking account where all funds were sent, then I paid necessary recipients from there
  • NOTE:  if have a 529 PrePaid Plan those funds must go directly to school

When should you withdraw from the 529 Plan?

  • Funds can be withdrawn after you paid the bill or reimbursed someone, but be sure to withdraw in the same calendar year the expense was incurred
  • I kept receipts for big ticket items (school statements, computers) but not monthly off-campus living, provided amount below college room/board
  • Allow at least a week before the bill is due for selling and settlement of 529 securities and the ACH transfers in/out of checking account
  • Yes, funds can go directly from 529 to school but be sure to set up address in 529 payee list and allow enough time for funds to arrive
  • NOTE:  if have a 529 PrePaid Plan check with plan; if covering out-of-state school likely requires even more time… and a lower factor applied to funds!

Any investment or savings considerations while doing the withdrawals?

  • Unlike retirement savings which may be years away and withdrawals stretched over 30+ years, college time horizon is much shorter (kids grow quickly!) and all funds are typically depleted over 4 years
  • Be sure the investment risk taking in a 529 plan is reduced as college age approaches – either through “age-based” portfolios or own rebalancing
  • Since only can make investment changes twice per year, take withdrawals from funds need to reduce for allocation reasons (n/a for age-based option)
  • Fine-tune remaining savings with more clarity on amounts needed
  • If more savings needed, likely keep making contributions into the 529 even while withdrawing if your state plan offers a tax deduction on contributions
    • NOTE:  One exception is if Modified Adjusted Gross Income is under $80k for single or $160k MFJ (partial credit up to $90k/$180k).  Then consider paying up to $4,000 of tuition out of pocket to potentially maximize the American Opportunity Tax Credit worth up to $2,500 per child.  Talk to your accountant.
  • If excess funds in 529, can change beneficiary to other family members, leave for future education needs, or use portion to fund Roth IRA (if qualify)
  • If do withdraw for non-qualified expenses, investment gains only (not full principal) count as income plus 10% Fed tax penalty; state likely recapture past contribution deductions
  • If student got scholarship and as a result don’t need all funds, can withdraw that portion without 10% penalty but have same tax consequences


Parents and Students – Covering college costs portion not saved for in advance

If you weren’t able to save full amounts in advance then funds will need to come from some combination of parents and/or student.  This may be adjusting the parents’ budget, student loans (see FAFSA below), parent loans, or tapping the equity in different assets like home or insurance policies.  Be aware the interest rate on home equity lines are quite high these days, likely higher than the 8.05% rate on Parent PLUS loans.  Current rates on Federal loans for undergrads is 5.50%; graduate students pay 7.05%.


Parents – Establish Power of Attorney Health Care for Child

When your child turns 18 they legally are an adult with the authority to conduct financial transactions and control their own privacy.  This also applies to healthcare.  The school will likely have students sign paperwork allowing parents access to the healthcare information and decisions.  It is a good idea to establish a Power of Attorney – Health Care in case care is needed away from the school facilities or if paperwork or forms are requested to be sent somewhere.


Parents and Students – Complete FAFSA for potential aid and student loans

Ok, mostly parents will complete!  While it is too late for this academic year (deadline was June 30) be aware of the form and complete it for next academic year.  Normally it is available to file as early as October for the next academic year but there may be a delay for the ’24-’25 academic year due to changes made to the program (one change is no discount if more than 1 child in college!).

Completing this form helps inform any potential aid from the school but also is required if the student plans to take out a student loan, or the parent from the PLUS program.  So even if you think income is too high to qualify for aid, there are benefits for completing.


Parents and Students – Talk about who is paying for ‘extra activities’ and reasonable spending amounts

There may be many different approaches ranging from the student covers all expenses to the parents covering amounts up to a target amount.  And the approach you take will very likely differ from at least some other students your child will meet and interact with.  Having the open discussion now about where the money comes from, who is responsible for paying the amount, and spending guidelines will be welcome on both sides and make future money conversations go smoother with no surprises – or at least minimized.

Some schools have “college cash” that can be added to the student ID card.  If you decide to get a credit card for the student, consider keeping the credit limit lower (can use parent’s card for airline tickets).  The parent may need to co-sign on the card since the student likely has limited credit history.  Monitor the balance and be sure that timely payments are being made.  Do not get in the habit of running a balance that cannot be paid off each month.


Enjoy the many non-financial related topics and activities as well.  This is an exciting time for both students and parents.  Embrace the excitement – and your child – and watch them forge ahead.


Posted by Kirk, a fee-only financial advisor who looks at your complete financial picture through the lens of a multi-disciplined, credentialed professional.