As a parent, you know that time with your kids can go by in the blink of an eye. So whether you are preparing to send your child to kindergarten or are dealing with teenagers, it’s never too early (or too late) to start planning for their higher education. Not sure where to start or want to make sure you’re on the right track? We’ve gathered some of the most common financial mistakes parents make when it comes to college planning and provided some tips to avoid them.
Mistake #1: Assuming There Is Only One Way to Save
Take the time to explore the types of accounts that can be used to cover educational expenses. You may find you have more options than you thought.
Options could include:
529 plans -- Offer tax free growth on investments used for qualified education expenses.
Roth IRAs -- Provide tax free growth and flexibility to remain as part of your retirement portfolio if not needed for education expenses. It also is not included in the financial aid calculation.
UTMAs/UGMs -- Can be used for any expenses for the benefit of the child, not just education. However, this becomes an asset of the child at age of majority (18 or 21) and would be considered a child's asset for college financial aid.
Trusts -- Typically used by grandparents to protect assets for the beneift of a grandchild.
Consider how they differ and what aspects are most valuable to you. You’ll also want to consider factors such as your risk tolerance and how much time you have left to save.
Mistake #2: Buying Investments with High Annual Fees
You probably don’t want to have to think about additional fees when you’re trying to save for a huge expense such as college. However, excessive fees can make it much more difficult to reach your college planning goals. When choosing an investment vehicle or savings account for college planning, review any potential fees that could negate or diminish earnings.
Mistake #3: Relying on Your Retirement Funds to Pay for College
Depleting your retirement savings in order to send your child to school is a common mistake that parents make. It’s important to think ahead, because restarting your retirement savings in your 40s and 50s is going to make it difficult to actually retire when you want to. Instead of turning to your 401(k) or other retirement savings, look into student loans, scholarships, 529 plans and other college savings accounts.
Mistake #4: Failing to Consider Student Loans
Taking out student loans does not mean that you don’t make enough money. College is getting increasingly expensive every year, and there’s no shame in taking out a loan for a little help. In fact, when it comes to federal student loans there are about 42.9 million borrowers each year.1
Even if you don’t plan on borrowing money, fill out the FAFSA before sending your child off to school. It’s a quick and easy way to potentially receive aid, and you don’t have to take it even if it’s offered. Additionally, research loan types, including private and PLUS loan options, federal loans may offer lower-interest rates than private lenders - but this may not always be the case.
Mistake #5: Procrastinating
The earlier you get started on planning how to fund your child’s education, the better off you will be. With the impact of compounding interest, even just a couple of years can make a difference in your savings. Take the first step by calculating the potential future cost and consider how many years you have left to save. This way, you’ll have a specific number in mind when it comes to putting money aside each month. Even just starting out with a small amount set aside each month will get you in the habit of saving.
Still stressed out by the thought of starting your college planning journey? Use these tips as a jumping off point as you work with your financial plannerto develop a college savings strategy for your future graduate.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.