Helping With College Costs When Retirement Is Ten Years Away

A parent with a student in college and about ten years before retirement is often paying for two goals from the same pool of money. Retirement has a fixed start date, while college costs are spread across several years and several sources. The Parent PLUS limits that took effect July 1, 2026 change how much a parent can borrow, and that affects the whole plan. It is written for parents of students who are already in college or about to enroll.

Federal loans for the student and for the parent

Dependent undergraduates can borrow in their own name through Direct Loans, up to $5,500 in the first year, $6,500 in the second year and $7,500 in the third year and later, with an aggregate limit of $31,000. No more than $3,500, $4,500 and $5,500 of those annual amounts, and $23,000 of the aggregate, can be subsidized, which means the government pays the interest while the student is in school. A dependent student whose parent is denied a PLUS loan because of an adverse credit history can borrow additional unsubsidized amounts.

Parent PLUS loans are borrowed by the parent. For loans first disbursed from July 1, 2025 through June 30, 2026, the interest rate was 8.94%. For loans first disbursed from July 1, 2026 through June 30, 2027, the rate is 9.07%, fixed for the life of the loan, and the origination fee is 4.228% of each disbursement. Before July 1, 2026, the limit was the cost of attendance minus other aid. Under the July 2025 law, loans first disbursed on or after July 1, 2026 are limited to $20,000 a year and $65,000 in total for each dependent student. A parent may continue borrowing under the earlier rules if the student was enrolled in the program on June 30, 2026 and a Direct Loan was received for it before July 1, 2026. The exception lasts for the shorter of three academic years or the program length, and ends if enrollment stops.

For loans first disbursed before July 1, 2026, the standard repayment term is ten years, and for loans first disbursed on or after that date the term runs from 10 to 25 years, depending on the balance. For a parent who is ten years from retirement, repayment can run to the first day of retirement or beyond, when earned income has typically ended. Repayment generally begins soon after the final disbursement, although a parent can ask for a deferment while the student is enrolled at least half time.

Using savings and retirement accounts

A 529 plan allows tax-free withdrawals for tuition, fees, books, required supplies and, for students enrolled at least half time, room and board (Section 529(e)). The earnings portion of a withdrawal that exceeds qualified expenses is taxed and carries a 10% additional tax.

Retirement accounts follow different rules. The 10% additional tax on withdrawals before age 59 and a half does not apply to IRA withdrawals used for qualified higher education expenses (Section 72(t)(2)(E)), but the withdrawal is still taxed as ordinary income, and the exception does not extend to 401(k) distributions. A 401(k) plan may allow a loan of up to the lesser of $50,000 or the greater of half of the vested balance or $10,000, reduced by the highest loan balance outstanding in the prior twelve months, generally repaid within five years, and an unpaid balance can be treated as a distribution if employment ends. Either route reduces the balance that stays invested for retirement.

How financial aid treats retirement assets

The FAFSA does not ask about balances in 401(k) plans or IRAs, so those balances do not count in the federal Student Aid Index. Income does count, and the FAFSA uses tax information from two years earlier. A taxable IRA withdrawal, a Roth conversion or a large capital gain raises the income that colleges see on a form filed two years later. A 529 plan owned by a parent is reported as a parent asset. Some private colleges also require the CSS Profile, which asks additional questions and applies each school’s own methods. Need-based aid declines as income and assets rise, and merit aid depends on the college.

Education tax benefits

Two credits apply to qualified education expenses. The American Opportunity Tax Credit is worth up to $2,500 per student for the first four years of college, and the Lifetime Learning Credit is worth up to $2,000 per return. Both phase out when modified adjusted gross income is between $80,000 and $90,000 for single filers and between $160,000 and $180,000 for joint filers (Section 25A(d)). These ranges are not indexed for inflation, so many higher-income households do not qualify.

The student loan interest deduction allows up to $2,500 of interest. For 2026, it phases out between $85,000 and $100,000 of modified adjusted gross income for single filers and between $175,000 and $205,000 for joint filers. A parent who is legally obligated on a loan taken for a dependent, as a Parent PLUS borrower is, can generally deduct the interest. IRS Publication 970 describes these rules.

Where the two goals compete

• The number of loan payments that would fall after the planned retirement date.
• How much can be paid from current income without reducing contributions to retirement plans.
• Whether the student can borrow in their own name, and how the terms differ between the student’s loan and the parent’s loan.
• Whether the student was enrolled on June 30, 2026 and qualifies for the transition rule, or is subject to the new limits.
• The income that future FAFSA forms will show, which comes from tax returns two years earlier.
• The number of children who will need support, and the years in which their costs overlap.

Loans, savings and retirement funds all draw on one household budget, but on different schedules. Your adviser can set the tuition schedule beside your retirement timeline, and a tax professional can speak to the credits, deductions and withdrawal rules on your return.

This article is provided by Austin Wealth Management for general educational purposes only. It is not financial, investment, tax or legal advice, it does not consider your individual circumstances, and it does not create an advisory relationship. Austin Wealth Management provides advice and services only under a signed advisory agreement, and the terms of that agreement govern. Rules and limits change, so information here may not be current. Consult a qualified financial professional before making financial decisions.