College Planning: 7 Financial Mistakes to Avoid
College costs continue to increase each year. That means families need to prepare for those costs and not wait too long to get started saving. But, often there are a few mistakes that families make while saving for college. In fact, about 75 percent of kids ages 8 to 14 say they will probably or definitely go to college, yet 49 percent of parents are not regularly saving for the cost of attending, according to a report from T. Rowe Price. The good news? These mistakes are definitely preventable, and it’s never too late to start saving the right way.
1. A savings account is the way to save.
This is false. Parents should set up a 529 plan, which is a tax-efficient college savings plan, for their kids rather than a savings account. “There is more parents can do, and they’re not doing it,” Stuart Ritter, CFP, senior financial planner at T. Rowe Price, told Forbes. “The idea that parents think a savings account is better for college than a 529 plan is akin to a retiree believing a savings plan is better than a 401(k) or IRA. They are missing out on financial opportunity.”
2. Who’s paying for college?
There is often some disconnect between families when it comes to who is paying for the schooling. Make sure you’re having talks about college costs early on to avoid confusion. According to the repot from T. Rowe Price, 29 percent of parents say they expect to pay for most or all of their kids’college costs, while 53 percent of kids who were surveyed said they expect their parents to pay for most or all of their schooling.
3. College savings should come before saving for retirement.
This is incorrect, yet 52 percent of parents say it’s more important to save for their kids’ college instead of their retirement. But parents need to make their retirement account a priority. There will always be scholarships or grants available for their kids when it comes time to go to school. Unfortunately, nothing like that exists when it comes to retirement.
4. There aren’t education-related tax breaks offered.
Actually, some of the most generous tax benefits available to middle-class Americans are related to college planning, About writes. The benefits can come in the form of a tax deduction or a tax credit and can save you thousands of dollars for paying college tuition or even funding that 529 account. The Hope Scholarship and the Lifetime Learning Credit can put between $1,500 and $2,000 into your pocket at tax time – make sure you take advantage of it.
5. Inflation for college costs won’t increase that much.
Sadly, they probably will. About writes that college costs tend to increase 5 to 6 percent every year, meaning that college costs are rising three times as fast as life’s other costs. Look into accounts that help fight that inflation, such as Prepaid Tuition Plans, which help you make sure a college education remains within reach.
6. “My CPA can handle my financial forms.”
Your CPA is an expert at tax planning and preparation – not so much when it comes to financial aid planning. “For example, a CPA or tax preparer might suggest that you put some or all of your assets in your child’s name to save money on taxes. While this advice is well-meaning, it will usually kill most or all of your chances at getting financial aid,” according to College Money Pros. CPAs aren’t trained in filling out financial aid forms, so in some cases they could unknowingly fill out the forms incorrectly. If you fill it out incorrectly, you’ll have to re-submit your forms. Since financial aid is awarded on a first-come, first-serve basis, you don’t want to be re-submitting forms over and over again.
7. It’s OK to procrastinate.
Not when it comes to college planning. From the time your children are young, you should be calculating what future costs will be and what you need to save each year. If you don’t save that exact amount each month that doesn’t mean you’re in big trouble. But it gives you a goal and an idea of what you should be trying to put away.