Making strategic adjustments can help stretch college savings accounts beyond a four-year degree.

Use 3 Tips to Allocate College Savings for Graduate School

Parents can use savings in 529 plans to pay for both bachelor’s and master’s degrees.

Making strategic adjustments can help stretch college savings accounts beyond a four-year degree.
By + More

It's hard enough for parents to save money to send their child to a four-year college, let alone to a graduate school. But with careful planning, funds saved for four years of education in a 529 plan, a tax-advantaged investment account, can help students get through six.

Two certified public accountants and personal financial specialists—Lisa Featherngill in North Carolina and Jason Washo in Arizona—offer advice for parents of undergraduate students who plan on pursuing master's degrees.

[Learn more about paying for graduate school.]

1. Use money accumulated for college wisely: If parents haven't saved enough to cover 100 percent of their child's entire education, don't withdraw all 529 plan funds during the student's undergraduate years, Washo says. Investments untouched by first year college students could continue to grow for four more years until needed for graduate school. In four years, earning 2 percent interest on $20,000 adds $1,648 to a college savings plan account.

During a student's undergraduate career, Washo suggests parents contribute what they can out of their paychecks instead of withdrawing funds from 529 plans. For instance, if parents can afford to contribute $200 per month to a 529 plan while their child is in college, use these funds directly toward this year's academic expenses. Over the course of a school year, parents would offset costs by $1,800.

Parents should also consider state tax benefits or matching grant programs. A state matching grant for 529 distributions might make adding money to 529 plans, even while withdrawing funds in the same year, advantageous. Contact the state treasurer's office each year to find out about availability, Washo suggests.

[Read more about getting a 529 plan boost from your state.]

2. Review 529 plans annually: Keep in mind that situations change. One year a family may experience a layoff of the main income earner, Washo says. In this case, it may be hard for parents to contribute to their child's college savings. However, it could make their son or daughter eligible for additional financial aid in the form of grants, need-based scholarships, or subsidized student loans, he says.

If additional aid is available, this may be the year to skip 529 withdrawals. If the only financial aid offered is through unsubsidized loans, which charge interest throughout a student's time in college, this could be the year to withdraw the full amount of qualified education expenses from 529 accounts, he notes.

For example, a freshman student qualifies for subsidized federal student loans based on his parents' income. He might use subsidized student loans this year, because he won't be charged interest while in school. Meanwhile, his investment account continues to grow in dollar value.

[Stay up to date with the Student Loan Ranger.]

3. Ask college students to contribute: Parents aren't required to fund their student's education, Featherngill says. If students get part-time jobs, parents should discuss with their sons or daughters how much of the students' income should be deposited into 529 plans or applied toward current education costs.

For instance, a thousand dollars earned could pay for a year's worth of textbooks. This can reduce undergraduate spending, so more money remains in 529 savings plans for grad school.

Families should also consider other aspects of their financial situation, such as financial aid eligibility, as noted above. If at some point students decide not to attend grad school and the money is already saved, parents have options. Any excess amount above what's needed for the rest of their schooling can be transferred to another family member or could be withdrawn with a penalty.

Before transferring college savings leftovers, parents should discuss all possible scenarios for what can happen to the funds. "Most likely funds will be depleted, but if not, the balance can be a nice start for another family member's fund or the student's postgraduation future," says Featherngill.

Reyna Gobel, frequently quoted as an expert on student loans and college costs, is the author of "Graduation Debt: How To Manage Student Loans And Live Your Life" and "How Smart Students Pay for School: The Best Way to Save for College, Get the Right Loans, and Repay Debt." She has appeared on PBS's Nightly Business Report and speaks regularly at CollegeWeekLive.