Parents often have the best intentions for helping their children obtain a college education, but the decisions they make as they plan to pay for college can often work against them. Below are seven common mistakes we see parents make when they are considering how to fund their children’s education:
1. Assuming a 529 plan is the best or only savings option
A 529 plan can be a great tool to accumulate resources for college because of the tax benefits it offers when used for education, but there are multiple strategies that may be used to save for college, and the appropriate solution depends on a number of factors including timeline, risk tolerance, tax considerations, and financial aid implications. It’s important to consider the benefits and drawbacks of each strategy in light of your overall financial plan.
2. Failing to adjust investment allocation
Parents often utilize market-based investments that allow their college funds to grow over time, but if the timing of college payments coincides with a downturn in the market, it can be frustrating to see those lost savings. Implementing a strategy to reduce downside risk as college draws closer is critical to avoiding frustration or forcing parents to find other funding alternatives
3. Making spending decisions without a clear plan
It’s been said that college planning is really retirement planning in disguise, and many parents make the mistake of depleting retirement resources without understanding the impact on their own retirement plan, or they don’t have a specific plan for how much they will pay for college and how much they will expect their children to pay. Having clear goals and expectations before starting the college search will help inform the selection of an appropriate school.
4. Excluding their CPA from the conversation
Tax considerations may be one of the most important factors in determining an appropriate saving (and spending) strategy for college. A CPA can help make sure you are able to take advantage of any available tax credits, or steer you in another direction if you would not be eligible for such tax credits. An appropriate strategy may depend on your income level, your children’s income, how much of college they are paying for, and how it is funded. Leaving the CPA out of the equation can be a costly mistake.
5. Ignoring financial aid implications
Not everyone is eligible for financial aid, and a thoughtful college savings strategy should not be focused solely around maximizing financial aid because there is no guarantee of receiving such aid. However, too often the potential financial aid implications are not even considered. The type of account you invest in and how that account is titled can impact the Expected Family Contribution, potentially costing you aid that you might otherwise have been eligible for.
6. Not coordinating with other family members
Similar to the financial aid implications, failing to communicate with grandparents or other family members who wish to help with college can end up costing you financial aid, additional taxes, or other lost benefits. Good communication is critical to ensure plans are not disrupted by unexpected gifts from family.
7. Accepting the first offer without negotiating
Colleges are in the business of competing for your student. Many parents assume that whatever offer is initially made is the best the school can do. Sometimes simply asking what else can be done will prompt the school to “find” other money in the form of grants or scholarships. In addition, if your child is considering multiple schools, it’s okay to ask one school to match another offer for financial aid. Even if they don’t match, they may get you closer to your target.
While this is not an exhaustive list, avoiding these seven mistakes and seeking advice from the experts can make a big difference in the dollars available to pay for a child’s college education and ensure that your own future retirement plans are not put in jeopardy needlessly.
