Common College Savings Mistakes To Avoid

Setting aside enough money to put your kid – or kids – through college is no easy feat. It’s hard enough just to feed, clothe and entertain them, let alone save up tens of thousands of dollars not knowing exactly how much you will need. If one thing is sure, it’s that you definitely want to start a 529 plan if you’re going to set some money aside for their college fund, but you also want to make sure that you are paying attention to the growth of your account and the rising costs of college tuition over the years.

Because if there’s one thing you can count on, it’s that college tuition will be much more expensive once your kid is ready to start applying. Here are some common college savings mistakes to avoid.

Using Something Other than a 529 Plan

Without a doubt, a 529 plan is the best way to go when you’re trying to find out what kind of account to open for your college savings. This is because these plans give you the ability to have full control of the funds in the account, they give you federal tax-free earnings growth, they don’t have any income or annual contribution limits, and they allow you to make tax-free withdrawals.

Failing to Check on Your Account Periodically

It’s definitely a good idea to put your account on auto pay so that you don’t forget to make contributions, but that doesn’t mean that you should just leave it alone for years on end. Whenever there is a major change to your family situation, such as changes to your income or regular expenses, you want to make sure that you reflect those changes in your monthly contributions. You should also have a schedule that will help you predict where your account balance should be every 4-5 years. If you are falling off schedule, then you should definitely adjust your contributions.

Relying on Scholarships

A lot of parents don’t save up enough because they are counting on their kids getting hefty scholarships. It’s important to remember that very few students receive full ride scholarships, and even when they do, there are often very large expenses to pay in regard to cost of living. So make sure that you account for those costs as well.

Not Accounting for Scholarships

The scholarship thing is a very delicate balance, because while you don’t want to rely on the prediction that your child will win a big scholarship, you also don’t want to discount the fact that the average student will receive around $12,000 in scholarships. This is important because any non-qualified withdrawals will incur a 10% penalty and income tax charges. However, if you plan to put your child through an expensive graduate program, like GW’s masters degree in political science, then you can leave those excess funds there for later.

Waiting Until It’s Too Late

It may be a little bit precocious to start saving the day that your child is born, but you definitely don’t want to wait until it’s too late. In the end, time is always on your side, so the earlier you start, the better. Just be sure to talk it all out with a reliable financial adviser once you’re ready.