Six Tips for Guiding Parents through Financial Planning for College

Western CPE Staff

As financial planning professionals, you often encounter parents who are overwhelmed by the prospect of saving for their children’s college education. That’s where you come in. Your role as a financial planner puts you in a position to ensure the continued development of a child’s education, helping those who go to college reach their goal of earning a degree. Your work has lasting generational benefits, but with college costs continuing to rise significantly year over year, families need your expert guidance to develop effective saving and funding strategies that foster their children’s educational future.

The federal tax landscape for education benefits shifted in 2025. The One Big Beautiful Bill Act (OBBBA), enacted as P.L. 119-21 on July 4, 2025, expanded several college-related tax provisions, made the employer student-loan repayment benefit permanent, and added an identification requirement for education credits beginning with 2026 returns. The IRS maintains a dedicated landing page at IRS.gov/OBBB. Here are six essential tips for guiding parents through financial planning for college.

1. Start with Tax-Advantaged Savings Vehicles

A 529 College Savings Plan should be your go-to recommendation for most families. Per IRS Topic 313, earnings in a qualified tuition program (QTP) accumulate tax-free, and distributions are not taxable when used for qualified higher education expenses. Qualified expenses include tuition, fees, books, supplies, and equipment at eligible postsecondary institutions, plus room and board for students enrolled at least half-time. Be sure to check 529 plans by state, as terms vary.

OBBBA expanded what 529 plans can do:

For K-12 expenses, the annual cap rises from $10,000 to $20,000 per year for distributions after December 31, 2025, and now also covers curriculum and curricular materials, books, online education materials, qualifying outside-the-home tutoring, fees for nationally standardized achievement tests, AP and college-admission examination fees, dual-enrollment fees, and educational therapies for students with disabilities.
529 funds can now be used for registered apprenticeship program expenses (fees, books, supplies, and equipment) and qualified postsecondary credentialing expenses.
Up to $10,000 lifetime per individual can be used to pay principal or interest on a designated beneficiary’s or sibling’s qualified student loan. Interest paid with these funds is not eligible for the student loan interest deduction.
For distributions made after December 31, 2023, a 529 beneficiary may roll funds over to their own Roth IRA, subject to a $35,000 lifetime cap, the Roth annual contribution limit, and a requirement that the 529 account has been open at least 15 years. The rollover must occur via a direct trustee-to-trustee transfer.

For families that qualify, also discuss Coverdell Education Savings Accounts (ESAs). The annual contribution limit is $2,000 per beneficiary, regardless of how many accounts or contributors. Per Pub. 970, the ability to contribute phases out for MAGI between $95,000 and $110,000 (single) or $190,000 and $220,000 (joint). Contributions must generally stop when the beneficiary turns 18, and the balance must be distributed within 30 days after age 30 — special-needs beneficiaries excepted.

2. Maximize Education Tax Credits

Once a student enrolls, two credits become central: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

The AOTC offers up to $2,500 per eligible student for the first four years of higher education — 100% of the first $2,000 in qualified education expenses plus 25% of the next $2,000. Up to 40% of the credit (up to $1,000) is refundable. To qualify, the student must be pursuing a degree or recognized credential, be enrolled at least half-time for at least one academic period, not have completed the first four years of postsecondary education before the tax year, not have claimed the AOTC or former Hope Credit for more than four tax years, and have no felony drug conviction at the end of the tax year. Filers and students must have a valid TIN by the return’s due date (including extensions), and the institution’s EIN must be entered on Form 8863.

The LLC provides 20% of the first $10,000 of qualified expenses — up to $2,000 per tax return. There is no limit on the number of years the LLC may be claimed, and it covers undergraduate, graduate, and professional courses, including coursework taken to acquire or improve job skills.

For 2025 returns, both credits phase out for MAGI between $80,000 and $90,000 (single) or $160,000 and $180,000 (joint), and are eliminated at $90,000 / $180,000.

Pub. 970 confirms that beginning in 2026, anyone claiming the AOTC or LLC must have a Social Security Number valid for work that was issued before the return’s due date. If the claimant is not the student, the student must also have a valid SSN. Flag this for clients now so any documentation gaps can be addressed before filing.

Caution clients claiming the AOTC: incorrect claims can trigger a two-year ban for reckless or intentional disregard (10 years for fraud), repayment with interest, and accuracy or fraud penalties.

3. Leverage Employer-Provided Educational Assistance

Section 127 educational assistance programs allow employers to provide up to $5,250 per calendar year, tax-free, for an employee’s tuition, fees, books, supplies, and — through a provision OBBBA made permanent — principal or interest on the employee’s qualified education loans. Per the IRS Section 127 FAQ, the $5,250 cap will be indexed for cost-of-living increases for tax years beginning after 2026.

Both undergraduate and graduate-level coursework qualify. Loan payments may be made directly to the lender or to the employee. The benefit is for the employee only — spouses and dependents do not qualify under Section 127. Encourage clients with college-age children who are working, or adult children repaying loans, to ask whether their employer offers a Section 127 plan and, if so, what the plan covers.

4. Structure Loan and Interest Deduction Strategies

Loans are often part of the equation. Per Pub. 970 chapter 4, the student loan interest deduction is up to $2,500 and is claimed as an adjustment to income — meaning clients can take it without itemizing on Schedule A. For 2025, the deduction phases out for MAGI between $85,000 and $100,000 (single) or $170,000 and $200,000 (joint), and is eliminated at $100,000 / $200,000.

Coordinate carefully across benefits:

529 funds used for loan repayment count toward the $10,000 lifetime limit per individual, and interest paid with those funds cannot also be claimed as a student loan interest deduction.
Loan principal or interest paid by an employer through a section 127 plan cannot be deducted by the borrower.

Make sure that parents know the deduction reduces taxable income — not the loan balance itself — and that planning ahead can preserve the deduction’s value as MAGI rises.

5. Create Clear Contribution Guidelines

Helping parents establish realistic savings targets based on their goals and resources is essential. Work with them to determine what percentage of college costs they can reasonably cover while maintaining their other financial priorities. Consider suggesting a balanced approach: some expenses covered through advance savings, some through current income during college years, and some through future income via loans. Emphasize the importance of starting early to maximize compound growth in tax-advantaged accounts.

6. Implement a Comprehensive Education Funding Strategy

It’s not uncommon for parents to dip into savings or retirement funds to give their children a better future. As their planner, you can develop strategies that protect a parent’s retirement while supporting their college fund goals. Show families how to integrate need-based aid, merit scholarships, family contributions, and tax-advantaged savings, and how the new flexibility in 529 plans — apprenticeships, credentialing expenses, and the Roth IRA rollover — gives them a soft landing if a child takes a different path. Discuss prepaid tuition plans for risk-averse clients who want to lock in current tuition rates.

Help Educate the Future

Your role extends beyond technical advice about savings vehicles and tax benefits. You’re helping parents with their financial challenges while ensuring their own financial security isn’t compromised, and you’re playing an instrumental role in a child’s educational future. With OBBBA now in effect, the toolkit is broader and the stakes for getting the details right are higher. By implementing these strategies thoughtfully and systematically, you can help your clients develop realistic plans that balance their desires to provide educational opportunities for their children with their broader financial goals.

Interested in learning more about college financial planning and education tax benefits? We’ve got you covered: