It is never too late to make sure that your financial preparation for college is on track, regardless of whether you have just given birth to your first child or are the parents of a teenager. Compare your existing plans to the top 10 most common college planning mistakes we've compiled, and make adjustments to your approach if necessary. You may make sure that you are saving enough money even if you only have a couple of years before you have to start writing checks for tuition if you plan ahead.
Failure to reduce the expected family contribution (EFC) for which you are responsible
The Expected Family Contribution, also known as the EFC, is the portion of your family's income and assets that you'll be expected to spend in a given year prior to receiving financial aid for your education. This amount is determined by taking into account the number of people in your household. In practice, financial aid will only cover the portion of the cost of attending college that is in excess of your expected family contribution (EFC). It does not make sense to try to make less money in order to receive more financial help; however, it does make sense to make sure that your child's savings accounts are named appropriately so that they can receive financial assistance. For example, twenty percent of assets are held in accounts owned by the child, such as those established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), which are expected to be used annually to pay for college costs. On the other hand, it is projected that a maximum of 5.64 percent of the assets held in the name of a parent will be used. Even better, there is no expectation that any of the grandparent's assets will be used to support the grandchild in any way (since there is no place to designate this on the FAFSA form). The Expected Family Contribution (EFC) will be replaced by the new Student Aid Index (SAI) for award years beginning in 2023–24. As a result, the FAFSA form will begin to ask different questions beginning in July of 2023. To a large extent, it is the same figure, but it is intended to represent the fact that the EFC cannot be anticipated to be paid by all households.Ignoring the Horizon of Your Time
In contrast to retirement assets, which the majority of people will gradually empty over the course of 20 to 40 years, you may anticipate that your college savings account will be depleted over the course of a significantly shorter window of time, ranging from two to four years. This means that, unlike with your retirement account, you do not have the flexibility to ride out a momentary setback in the investing markets. This is in contrast to your retirement account, which gives you this freedom. When you have at least ten years until you need the money, investments with a higher level of risk may be acceptable. However, when the time draws nearer for you to actually need the money, you should think about shifting towards assets with a lower level of volatility. Age-based accounts in Section 529 plans are made to make this process automatic, which makes them a great choice for parents who are short on time or don't know much about investing.Avoiding the Tax Breaks for Your Educational Expenses
College preparation is eligible for a number of the most generous tax breaks that are made accessible to Americans in the middle class. These benefits, which may come in the form of a tax deduction or tax credit, have the potential to save you thousands of dollars for the purpose of paying for college tuition or funding the Section 529 account for your state. Individuals who have adjusted gross incomes of $90,000 or less (or $180,000 if married and filing jointly) are eligible to apply for the American Opportunity Tax Credit, which was formerly known as the Hope Scholarship. The American Opportunity Tax Credit offers up to $2,500 in annual funding to each student. A maximum of $2,000 of the first $10,000 that an individual spends on higher education is qualified for a tax credit for "Lifetime Learning."Overlooking Student Loans
Student loans are seen by many parents as a humiliating admission that they do not make enough money or that they did not save what little they did have effectively enough. While this is sometimes the case, it is crucial to keep in mind that the cost of attending college is rising at a rate at which the majority of Americans are unable to keep up. If parents and students make good use of the various federal student loan programs available to them, they may be able to fund a college education at interest rates as low as 2.25 percent per year. During the pandemic, the US Department of Education set a zero percent interest rate and suspended payment requirements. These measures will remain in effect until at least September 30, 2021. Even if you do not believe you will ultimately borrow money through programs such as PLUS loans, it is still necessary to complete the FAFSA form. This is the most basic form that is used by the financial aid offices of most institutions to evaluate what kind of assistance you may be eligible for. The most unfortunate thing that could possibly happen is that they would say no.Inflation's effects are being underestimated as a whole
It is difficult to do an acceptable job of planning for college until you have a solid understanding of the rate at which the costs of attending college are growing out of control. College tuition and fees, on the other hand, have a tendency to climb by between 5 and 6 percent on an annual basis, while the general "cost of living" has "inflated" at a historically average rate of 2 percent each year. This indicates that the expense of attending college is increasing three times as quickly as the cost of living generally, and most certainly three times as quickly as your paycheck. It is essential to have a solid understanding of how to choose investments appropriately and to make use of accounts that are designed to combat inflation, such as prepaid tuition plans, in order to keep the cost of higher education within a realistic range.Attempting to Be Excessively Creative With Your Investments
Some families insist on non-traditional investments for their children's education funds, such as planting timber to be harvested when it is time for their child to go to college or attempting to corner the market on a baseball player's rookie card. Examples of these types of investments include planting timber to be harvested when it is time for their children to go to college. Although they might be interesting and one-of-a-kind assets, it is advisable to include them as part of a larger, more diversified portfolio. Not only do most of these investments not qualify for the tax benefits that other types of college savings accounts offer, but they also don't always give the results that people want. You have fewer than 20 years until you will need the money for your college education, so make sure you stay on the right path. Choose simple assets that will meet your needs and stay away from investments that were never meant to help pay for school.Investing in Assets That Have High Annual Fees And Costs
Unfortunately, it appears that an advanced degree in mathematics is required in order to comprehend the fees and costs associated with the majority of mutual funds and Section 529 plans. Even though it might be tempting to ignore this part of planning for college, it is important to make sure that your assets are as cost-effective as possible if you want them to grow over time. Even though it might not appear to have a significant impact, an increase in fees of just 2 percentage points can bring a portfolio's total value down by as much as 40 percent after 25 years. Even if you have a portfolio that is performing well, paying excessive fees might significantly raise the amount of money you'll need to put away each year in order to meet your personal college planning objectives.Using the Incorrect Types of Savings Accounts for College
You are able to designate practically any sort of account, from a checking account at your bank to a Roth IRA, as college savings account for your child. You can even combine multiple accounts into one. Nevertheless, it is important to keep in mind that not all of these accounts are created equal. When purchased with one kind of account rather than another, the same mutual fund can be subject to a higher level of taxation than it would be otherwise. In a similar vein, one account can damage your prospects of receiving financial assistance four or five times more than another. The first thing you need to do in order to select the appropriate college account is to strengthen your vocabulary. You need to be familiar with the various accounts and the fundamental characteristics of each one. Get familiar with the various types of accounts that can be used to save money for colleges, such as 529 plans, Coverdell ESAs, Roth IRAs, UTMAs, UGMAs, and trusts. Some of these accounts are used to save money.Utilizing Your Savings for Retirement to Help Pay for College
The use of existing retirement money to pay for college is the second most harmful mistake that many parents make while budgeting for their children's college education. In other words, the majority of parents opt to receive dividends or loans from their company's 401(k) plan or another retirement plan rather than take out student loans. This is typically done in order to save money. To make matters worse, a large number of parents stop putting money into their 401(k)s or IRAs while their children are in college. The fact that the majority of parents, on average, make this error between the ages of 40 and 60 is what makes it such a significant oversight. Because of this, the remaining period to replenish the depleted funds before the retirement age arrives is an excruciatingly limited length of time. Borrowing against one's retirement fund can actually push it back anywhere from five to ten years, which is something that many parents are unaware of until it is too late. Keep this in mind if you are deciding whether or not to take money out of your retirement plan: it will always be much easier for you to get a student loan than a retirement loan.The most critical error in college preparation is procrastination
Procrastination is, by far, the worst thing you can do when it comes to preparing for college. You will have approximately 18 years from the time your child is born until you will be required to provide a significant amount of money for their education. If you continue to ignore that fact for another year, your out-of-pocket costs will go up by a lot. Calculating what your expenses will be in the future is the most crucial initial step, and you should get started on it right away. Because of this, you will be able to determine how much money you need to set aside each year in order to reach your objective. Just because a college savings calculator informs you that you need to save $250 a month does not necessarily mean that this is the only option available to you; you are not obligated to save any money at all. However, if you are aware of the number, you are able to keep track of how each dollar is spent. Even if you might only be able to put away $100 each month, knowing your goal amount will help you make better financial decisions whenever you come into possession of additional funds.