4 Common College Savings Mistakes Parents Make – And How to Avoid Them
Posted By Donna Fuscaldo on September 3, 2015 at 12:30 pm
Sending a child to college is one of the most costly expenses a family faces. With the average tuition at a private school standing at $31,231 and $22,958 for a public institution (out of state), anything parents can do to put away money will help.
But in order to maximize savings, parents have to avoid some common (and not so common) mistakes. And it all starts with determining whether you should even save for your child’s education to begin with.
Putting college before retirement
“A lot of times parents might be on the edge whether or not they can retire themselves so every dollar that goes toward saving for college does not go to their own retirement,” says Mike Brady, president of Generosity Wealth Management. “A child can loan themselves through four years of college. A parent can’t loan themselves through thirty years of retirement.”
New and veteran parents alike may think they are doing their children a service by saving all their money for school, rather than saddling their eventual graduates with debt. But living in retirement for thirty years isn’t a stretch anymore, and putting college savings ahead of retirement can create an untenable situation. However, many Americans don’t care or don’t realize the impact not saving for retirement will have. T Rowe Price’s March Family Financial Trade-Offs survey found that more than half of parents (53%) said tapping into their retirement savings was preferable to having their children take on loans. Brady says parents need to ignore the knee jerk reaction to pay for higher education, and really evaluate whether they can afford to foot the entire bill and save appropriately for retirement.
Putting savings on the back burner during tough times
During the recent recession and even in the years leading out of it, many families put saving for college on the back burner as they struggled to pay their bills. Even ones with some extra money figured it would be a waste of time to save if they couldn’t save big. But every dollar saved is a dollar less that you’ll have to pay, says Mark Kantrowitz, senior vice president and publisher of Edvisors.com. On the flip side, he says, every dollar borrowed will cost you two dollars by the time you pay back the debt.
So – just how bad is the college saving rate in America? According to Sallie Mae’s How America Saves for College 2015 study, fewer than half of American parents are saving for college. Of those that are saving, it’s less than they were before the recession.
Saving the wrong way
Even parents who are saving often make big mistakes in how they go about it. According to Sally Mae’s survey, only 27% of savers had their money in a tax-advantaged 529 savings plan, with close to half keeping it in a typically low-interest savings account. Many parents think if they save money in a 529 college savings plan, it will increase the amount of family contribution before financial aid kicks in. While that is true, the amount that can be calculated toward college is only 5.64% of the 529 plan’s value. If parents put the 529 account in a grandparent’s or non-custodial parent’s name, then qualified distributions will be counted on the federal financial aid application as untaxed income, which can reduce the child’s eligibility by as much as half, says Kantrowitz.
Many parents who are taking advantage of a 529 savings plan also end up leaving money on the table by choosing the wrong investment type. People want to see their investment dollars grow, and, as a result, will often invest in a stock fund instead of choosing an aged-based asset allocation. With an age-based asset allocation, the money is invested more aggressively when the child is young, and gets more conservative as the child nears college. Putting your entire investment in an all-stock fund puts you at risk of losing it all if the stock market has another big sell-off, like in 2008 when the S&P fell by 500 points and 93% of college plans tracked by Morningstar fell in value. In fact, 1,098 out of 3,506 plans Morningstar tracked lost at least 40%.
Expanding the toy box instead of the savings account
Grandparents, aunts and uncles and even parents want to make their kids happy, and will often bestow them with expensive gifts on birthdays, holidays and other special occasions. A more long-lasting – and perhaps more meaningful – gift? Forgo a toy that will ultimately be forgotten, and put that money into a savings vehicle for college. USAA’s certified financial planner JJ Montanaro says parents should sit down with family members – and take a hard look at their own spending habits – to ensure that they aren’t throwing away money on toys and other perishables instead of giving the gift that keeps on giving: a college education. “Directing that money to savings has a much larger and influential impact for much longer,” says Montanaro.