As the importance of obtaining a college education continues to grow, so too does the cost. To combat these costs, it is imperative that parents avoid the mistakes listed below when saving for college. The decisions you make today will have a direct impact on your child’s future.
1. Not Saving For College Early Enough
A penny saved is a penny (plus interest) earned. Start saving as early and regularly as possible. This will give your money more time to compound/grow.
2. Saving For College In Child’s Name
A large college fund in the child’s name can actually lower the amount of financial aid they will receive. This is due to the formulas financial aid offices use when calculating the Expected Family Contribution (EFC). According to Savingforcollege.com, the formula counts the following financial resources as being available to pay college expenses:
- 20% of a student’s assets (money, investments, business interests, and real estate)
- 50% of a student’s income (after certain allowances)
- 2.6%- 5.6% of a parent’s assets (money, investments, certain business interests, and real estate, based on a sliding income scale and after certain allowances)
- 22%-47% of a parent’s income (based on a sliding income scale and after certain allowances)
Saving for college is extremely important. Just make sure it’s under your name to maximize the amount of student aid your child can receive.
3. Not Completing The FAFSA Forms Because You “Won’t Be Eligible For Financial Aid”
You should ALWAYS complete the forms. In reference to our previous blog regarding tips for filling out FAFSA forms:
The information you use for FAFSA may actually be used by some schools and states to award merit-based aid and other scholarships. Also, you may not need the aid now, but nothing in life is guaranteed. If you do need aid in the future, the process will be much easier if you’ve already filled out the form.
You can find the FAFSA form here. If you have additional questions, please contact us today or leave a comment below!
4. Not Pursuing Scholarships
Speak with your child’s high school guidance counselor regarding local scholarship opportunities. Many scholarship opportunities go unclaimed (free money going to waste). To ensure you’re not missing out on any scholarship opportunities, we recommend utilizing the follows resources:
5. Not Being Eligible For Tax Credits Because Of 529 Distributions
Double dipping: both disgusting when sharing chips and dip, and illegal when obtaining tax credits. According to Turbotax, if you deduct your Modified Adjusted Gross Income (MAGI) under some other provision of the tax code, such as for employee or business expenses, you cannot also deduct the expenses for the Tuition and Fees Deduction.
Also, you can’t deduct expenses paid with tax-favored money including:
- Tax-free interest from savings bonds
- Tax-free earnings from qualified state tuition program (Section 529 Plans)
- Tax-free earnings from Coverdell Education Savings Account
6. Not Having A Plan To Pay For College
Parents should plan cash flow as much as possible. If done correctly, not all college expenses need to come from savings but they can also come from current income. For example, if you’re paying ahead on a mortgage in the year’s prior to college, you can switch that extra monthly payment amount to college costs during the college years.
7. Forgetting To Continue To Save For Your Retirement
According to a report from Sallie Mae, nearly two in five parents are either planning to use their retirement funds to pay for a child’s college or are at least considering it. In doing so, your retirement savings will lose years of interest earnings. It will also decimate the compounding factor that helps these accounts support your retirement – placing you years away from your retirement goals.
To learn how to save for retirement effectively, contact our team of financial advisors today!
In Conclusion
Your child’s future is shaped by the financial decision you make today. Create a brighter educational and professional path by avoiding the mistakes listed above.
For more information about saving for college, please contact Magellan Financial today!
