If you are planning on paying for your child’s college education, you better get started as soon as possible. Saving that money can be a difficult proposition, made even tougher by parents who don’t realize the pitfalls that lie ahead.
Every year it gets increasingly more expensive to obtain a college degree through a traditional four-year program as tuition costs are rising quicker than the rate of inflation. That means you need to be even more dedicated to the task of finding the best methods for saving enough money to cover all of the costs associated with pursuing that degree.
The best course of action is to establish a solid game plan. Get started early enough and you should have the money ready to go by the time your child is preparing to submit applications to his or her top schools. This will also help you avoid searching in other accounts to make up the shortfall that might exist due to poor planning or saving too late.
Many parents will dip into their retirement savings to pay for a child’s higher education. If you think you can start the process when your child is starting high school, unfortunately you’ve already made the first and most common mistake when it comes to saving money for college. That is far too late in the game to ensure that you have enough for your child’s college plans. The goal is to have all the money you need without putting your own financial future at risk.
A smart savings strategy combined with a practical budget to control your spending can be of great assistance in managing your finances with college tuition in mind. But first you need to know about the major common mistakes that parents just like you commit on a routine basis. This way you can work to avoid them at all costs and reach your financial goals for tuition.
1. Starting Too Late
This is the biggest cardinal sin you can commit when it comes to planning for your child’s college education. With so many possibilities available to you, getting started on saving is easier than ever before. But it’s up to you to begin the process and stick with it for the long term. The earlier you establish a plan for saving, the more time you have for your money to grow through compounding.
Making consistent deposits into your fund is also important but it can get tough when there are so many other monetary obligations competing for your savings dollar. One way to avoid letting those commitments get in the way is to start saving as quickly as possible. Set up an account right after your baby enters the world and you’ll be on your way to saving all the money necessary for his or her education.
2. Establishing the Account in the Child’s Name
This is a common mistake that parents commit because they’re simply unaware of the ways in which the Expected Family Contribution (EFC) is calculated when a student applies for Federal Student Aid. The name under which you save money for tuition can have a drastic effect on the way that EFC is calculated and, as a result, could also affect the amount of money your family receives in aid.
Since the EFC is a measure of the family’s overall financial strength calculated through a number of determining factors, the name on the account you’ve established might prevent you from getting all of the aid you need.
Savings that are held in a parent’s name are assessed at 5.64% under the EFC calculations. If that same account is held under a student’s name, that money could be assessed at as much as 25% under the EFC calculations. The lower the EFC, the better your chances are (for your child) to get financial student aid. There is no asset protection allowance in place for accounts with a student’s name on it either.
3. Failing to Routinely Contribute
Contributing to a child’s college fund shouldn’t be an insurmountable challenge. Setting aside even a small portion each month can make a difference down the line. Putting aside $50 or $100 every month for a span of 18 years with even a moderate growth percentage can lead to a savings that gets into the mid-five figures by the time your child is ready to start school.
The right savings strategy incorporates a plan for including this monthly contribution as part of your budget and securing that deposit with consistency. One of the best methods for saving is done through a 529 plan, which has two options available, the prepaid plan and the state-sponsored plan. There are also certain tax benefits available with a 529 that allow you to get the most benefit from compounding without the taxes being applied to your savings when the money is used for tuition. You might even be eligible to enjoy a break on your state income taxes when you contribute to this plan on a regular basis.
4. Failing to Claim all Deductions and Credits
Depending upon the type of account you are using to save and pay for college, you might be making yourself ineligible for certain tax breaks offered by the government. The IRS has a hard and fast rule about taxpayers receiving too many benefits when it comes to tax advantages that come with accounts like a 529 plan.
Since a 529 offers account holders a tax-free distribution on the money that is accumulated, the tax code prevents that taxpayer from getting any further tax benefits from credits or deductions such as the American Opportunity tax credit. That could represent as much as $2500 in free cash from Uncle Sam, you don’t want to leave that money on the table.
5. The Selection Process
Parents should work with their child to pick a school that is both affordable and ideal for helping the child succeed after graduation. Failing to be involved in that process could result in the child picking a school that is out of the family’s budget range and inadequate for preparing the child for employment in the real world.
Making these components of the decision-making process a part of the discussion can be imperative for saving money when it’s time for college. Avoiding the accumulation of high amounts of debt hanging over the child’s head after they graduate will put them on the road to financial success a lot sooner than if they have to pay off financial aid after earning a degree.