5 College Planning Mistakes To Avoid

As a parent, you know that time with your kids can go by in the blink of an eye. One day, you're preparing to send your child to kindergarten, and the next, you’re packing the car to take them to college. No matter how old your children are, it's never too early (or too late!) to start planning for their higher education. To help you avoid common pitfalls, we've gathered some of the most frequent financial mistakes parents make when it comes to college planning.

Mistake #1: Procrastinating

Raising children is no easy task. With so much on your plate, college might not be at the forefront of your mind. However, the earlier you start planning how to fund your child's education, the better off you'll be. Thanks to the power of compounding interest, even a couple of years can make a significant difference in your savings.

For instance, if you invest $200 per month into a 529 plan when your child is born, assuming a 7% annual return, you could accumulate approximately $76,000 when they turn 18. Starting that when they’re 10 years old would result in about $22,000 by age 18–and something is always better than nothing!

Take the first step by calculating the potential future cost of college and consider how many years you have left to save. This will give you a specific target for monthly savings.

Mistake #2: Not Researching Account Types

While it helps to have various options for saving for your child's education, choosing the right savings account can feel overwhelming when you see all the options. Take the time to research the types of accounts that can be used to cover educational expenses. Options include:

• 529 Plans: Offer tax-free growth and withdrawals for qualified education expenses.
  
  
• Coverdell Education Savings Accounts (ESAs): Allow for tax-free growth, with contributions limited to $2,000 per year per child.
  
  
• Roth IRAs: Primarily for retirement, but can be tapped for education expenses under certain conditions.
  
  
• UTMAs/UGMAs: Custodial accounts that transfer to the child at the age of majority.
  
  
• Trusts: Provide control over how and when funds are distributed.
  
  

Consider how these options differ and what aspects are most valuable to you. Factors like your risk tolerance, time horizon, and potential impact on financial aid eligibility should be taken into account.

Mistake #3: Overlooking Investment Fees

When saving for a significant expense like college, it's easy to overlook the impact of investment fees. However, excessive fees can erode your returns over time, making it more challenging to reach your college savings goals.

When selecting an investment vehicle or savings account for college planning, review any potential fees that could diminish your earnings. Opt for low-cost index funds or ETFs when possible, and be wary of high-fee mutual funds that may not offer commensurate returns.

Mistake #4: Relying on Retirement Funds to Pay for College

Depleting your retirement savings to fund your child's education is a common mistake. Restarting your retirement savings in your 40s or 50s can make it difficult to retire when you want to. Instead of tapping into your 401(k) or other retirement accounts, explore alternatives like student loans, scholarships, 529 plans, and other college savings accounts.

Remember, there are no loans for retirement. Prioritize your financial security to try and avoid becoming a financial burden on your children later in life.

Mistake #5: Neglecting to Complete the FAFSA

Some parents assume they won't qualify for financial aid and skip filling out the Free Application for Federal Student Aid (FAFSA). However, completing the FAFSA is crucial, as it not only determines eligibility for federal aid but also for many scholarships, grants, and work-study programs.

Moreover, recent changes to the FAFSA process have made it more streamlined and accessible. Even if you don't plan on borrowing money, submitting the FAFSA can open doors to financial opportunities you might not have anticipated.

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Start Early, Stay Informed, and Seek Guidance

Navigating the college planning process can be daunting (especially with your first college-bound child!) but avoiding these common mistakes can set you and your child up for success. The simplest way to be proactive is to start as early as you can, stay informed, and seek guidance when you need it. 

If you're feeling overwhelmed, consider working with a financial advisor to develop a college savings strategy tailored to your family's needs and future financial goals.