Now that you’ve started to develop college savings goals for your child/ren, growing those savings should be a priority. Here, we discuss several common mistakes to avoid when saving for college.
Mistake: Your goal is too vague.
The best time to start saving for college is as early as possible, but most families have no idea where their newborn baby will attend college in 18 years. Because of this, parents often start a college fund with modest contributions of $25-100 a month – with no clear end goal in mind.
While this is a great way to get into the habit of saving, at some point parents need to focus on establishing a more solid plan. That doesn’t mean you need to decide on a particular school just yet, but maybe it’s time to think about how much you want to (and can afford to) pay for. That could mean planning to cover tuition for public or private, or 2-year or 4-year college, or simply giving a specific dollar amount.
Another common mistake parents make is shying away from saving because of sticker shock. If the total cost of a school seems out of reach, don’t worry! After grants and scholarships, families rarely end up paying the “sticker” price of colleges. A more realistic goal is to aim to save 25%, and find other sources to make up the difference. What’s more, saving too much can cost you if you end up having to take a non-qualified withdrawal from a 529 plan. When the money you take from your 529 plan is used for something other than qualified higher education expenses, you’ll lose your tax benefits and also get stuck paying a 10% penalty on the earnings portion of the withdrawal.
Mistake: You assume you won’t get financial aid.
The federal government awards over $150 billion in federal grants, loans, and work-study funds each year to millions of students. And that’s not even including additional financial aid provided by some schools. Yet higher-earning families often won’t even apply for aid because they assume they won’t qualify.
Financial aid offices expect families to be able to use up to 47% of their after-tax income to pay for college. But income isn’t the only factor used in the equation. Schools will also consider things like the type and cost of school the student plans to attend, any non-retirement assets owned, and the number of dependent children in the family. In fact, a college student who has a brother in college will be eligible for more aid than a student who is an only child, even if their household income is exactly the same. That’s because their Expected Family Contribution (EFC) will be split evenly between children in the family, increasing each child’s eligibility for aid. Lower EFC = more financial aid.
Mistake: You’re not considering scholarships.
So maybe your son or daughter isn’t a star athlete or academic genius, but that doesn’t mean they can’t find a scholarship! They key to finding one is to develop a strategy and keep applying all year long. Does your place of employment offer awards? Is your child involved in any extracurricular activities? These are all potential sources for scholarships. And don’t assume that you make too much money. According to Sallie Mae’s “How America Pays for College 2014” report, 38 percent of scholarships were awarded to families with a household income above $100,000.
So what happens to the money you’ve been saving in a 529 plan if your child gets a free ride to college? Well, you can save the money for graduate school, can change the beneficiary to another qualifying family member who will attend college, or take a non-qualified withdrawal. When a student receives a scholarship, non-qualified 529 plan withdrawals up to the amount of the tax-free award will avoid the 10% penalty tax. However, the earnings portion of the withdrawal will be subject to income tax.
Mistake: Your plan needs some attention.
If you’ve been saving for college for the last few years, when’s the last time you evaluated your strategy? Have you measured your progress toward your goal to make sure you’re on track? Are you still happy with the performance and management of your investments? If you’re not currently using a 529 plan – does it make sense to start?