Saving for your child’s education is one of the most thoughtful financial gifts you can give. A 529 plan offers real advantages — tax-free growth, tax-free withdrawals for qualified education expenses, and in many states, a deduction on your state income taxes. It’s a powerful tool.
But here’s something that surprises a lot of parents: funding a 529 is not always the right first move. Before you start routing money into a college savings account, there are five critical questions you need to answer. Get these right, and you’ll build real financial strength for your family. Skip them, and you might be optimizing one goal at the expense of your entire financial foundation.
Question 1: Do I Have High-Interest Debt I Should Pay Off First?
If you’re carrying credit card debt or other high-interest loans, paying those off before funding a 529 is almost always the smarter financial decision. Here’s the math: a 529 invested in a diversified portfolio might return somewhere around 6–7% annually over the long run. Credit card debt, on the other hand, often carries interest rates of 20% or higher. Every dollar you put toward a 529 while carrying that debt is effectively costing you the difference.
Think of it this way — paying off a 20% interest credit card is a guaranteed 20% return on your money. No investment can reliably promise that. Chasing tax-advantaged college savings while hemorrhaging money on interest charges is a bit like bailing out a boat without plugging the hole first.
This doesn’t mean all debt is a reason to pause. A low-interest mortgage or a manageable car payment aren’t the same as high-interest consumer debt. The key question is whether the interest rate on your debt is higher than the realistic return you’d expect from investing. If the answer is yes, knock out that debt first — then turn your attention to college savings.
Question 2: Am I On Track for Retirement?
This one is uncomfortable for a lot of parents to hear, but it’s one of the most important things a financial advisor can tell you: you cannot borrow for retirement the way you can borrow for college.
Your child has options — scholarships, grants, work-study programs, student loans, community college, in-state tuition. You have exactly one option for retirement: the savings you’ve built over your working years. If you sacrifice your retirement contributions to fund a 529, you may be solving your child’s problem while creating a much larger one down the road.
The general benchmark most advisors use is whether you’re maxing out — or at least meaningfully contributing to — your 401(k) or IRA before directing extra dollars into a 529. If you’re behind on retirement savings, the priority order is almost always: catch up on retirement first, then start funding education savings.
It also helps to reframe how you think about this. Funding your retirement isn’t selfish — it’s one of the most loving things you can do for your child. A financially secure parent who doesn’t need to lean on their kids in retirement is a gift that far outlasts a college tuition payment.
Question 3: Do I Have an Emergency Fund in Place?
A 529 is a long-term investment account — not a liquid savings vehicle. If you withdraw funds for anything other than qualified education expenses, you’ll owe income tax plus a 10% penalty on the earnings portion of that withdrawal. That’s an expensive emergency fund.
Before funding a 529, make sure you have three to six months of living expenses sitting in an accessible, liquid account. Life happens — a job loss, a medical bill, a major car repair — and having that cushion means you’ll never need to raid investment accounts at an inopportune time. Building your emergency fund first is the foundation that makes all other saving possible.
Question 4: Have I Considered All the Ways My Child Might Use This Money?
529 plans are powerful, but they come with strings attached. The funds must be used for qualified education expenses — tuition, room and board, books, and certain other costs — at an eligible institution. If your child decides not to attend college, earns a full scholarship, or takes a different path entirely, you’re left with a few options: transfer the funds to another family member, keep the account for future use, or withdraw the funds and pay the penalty.
Recent legislation has expanded 529 flexibility — you can now use funds for K-12 tuition, apprenticeship programs, and even student loan repayments. As of 2024, there’s also a new provision allowing unused 529 funds to be rolled into a Roth IRA for the beneficiary after 15 years (subject to limits). Still, the account works best when there’s a strong likelihood the funds will actually be used for education. Think through your child’s likely path before committing significant dollars.
Question 5: Do I Understand the Impact on Financial Aid?
This is a question many families don’t ask until it’s too late. A 529 owned by a parent is treated relatively favorably under federal financial aid formulas — it counts as a parental asset, which reduces a student’s aid eligibility by a maximum of 5.64% of the account value. That’s manageable.
But the picture can look different depending on who owns the account. A 529 owned by a grandparent, for example, used to count as student income when distributions were taken — a far heavier hit on financial aid calculations. Recent changes to the FAFSA have improved this somewhat, but the rules around 529 ownership and financial aid are nuanced. Before setting up an account, it’s worth having a conversation about account ownership, your expected family contribution, and how your savings strategy will interact with the aid process at the schools your child is likely to consider.
The Bottom Line
A 529 plan is one of the best savings vehicles available for education — but it’s most powerful when it’s built on a solid financial foundation. Before you fund one, make sure high-interest debt is under control, your retirement savings are on track, your emergency fund is in place, you’ve thought through how the money will actually be used, and you understand the financial aid implications.
Get those five questions answered, and a 529 becomes an excellent next step. Skip them, and you may be solving tomorrow’s tuition bill while unknowingly creating a problem you’ll feel for decades.
Have questions about whether a 529 fits into your broader financial plan? Every family’s situation is different, and the right answer depends on your income, debt, retirement timeline, and goals. Let’s have a conversation and make sure your education savings strategy is working in harmony with everything else.