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It’s a common piece of advice students hear year after year: Study hard so you can go to college and land your dream job. But how many discussions transpire in the home about the high cost of attending college?
Just like almost everything else in life, college comes with a price tag. While parents may not want to burden their children with figuring out how the expenses will be covered, the issue must be addressed at some point. And you must have a plan.
Here are six costly college planning mistakes you want to avoid:
1. Not discussing who is responsible
Have you determined who will foot the bill for postsecondary expenditures? Instead of playing the guessing game with your children, prevent conflicts that are bound to erupt from a lack of disclosure.
Your child’s expectations about your contributions may not match reality. In a recent survey, T. Rowe Price found, “Twenty-nine 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.”
It’s completely understandable for spouses from varying backgrounds to have different viewpoints on who should foot the bill, but what matters is that the two of you get on the same page and then discuss it with the children.
2. Stashing funds in a traditional savings account
Have you been stashing away funds in a savings account with a measly interest rate of, at best, 1 percent? If so, now’s the time to consult with a reputable financial adviser to evaluate and enroll in a college savings plan that will best suit your needs.
Stuart Ritter, 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.
Going the extra mile to set up a college savings plan may seem like a headache, but it’s definitely worth the hassle and will make your money work even harder for you. (See: “Everything You Don’t Know About 529 College Savings Plans.”)
3. Ignoring inflation
Because the cost of college has been increasing at a pace far higher than the rate of inflation, you must ensure that whatever plan you choose will generate a large enough return to keep up with those inflating costs.
Unfortunately, I witnessed the looks of despair on students’ faces each semester during my stint as a governmental accountant, because they couldn’t understand why, even after their parents had saved up for many years, their stash still wasn’t sufficient to cover their expenses.
4. Compromising your nest egg
The power of compounding interest works well in both college savings and retirement plans, so it may be tempting to stash away any residual funds while your children are young in order to fully fund their college education.
However, you can always borrow for college, but you can’t borrow for retirement.
If you want to be working well past retirement age, put the kids’ education first. (And if you happen to stumble across a scholarship program that covers the cost of living during retirement years, let me know.)
5. Delaying the process
If you’re waiting on that one big break — an inheritance, a risky investment, or a child who’s a brilliant scholar or has NFL-level athletic ability — to cover the costs of college, you may find yourself out of luck when your children reach the age of majority, and wishing that you’d used better judgment.
Remember, the power of compounding interest will be in your favor if you invest your funds wisely.
6. Not understanding how 529s work
Because 529s are among the most popular college savings plans, let’s take a closer look at some of the most common mistakes that savers make, according to LearnVest:
- Failing to read the fine print. The types of 529 plans vary by state.
- Spending the money on expenses that aren’t allowed. The money can’t be used for some college-related expenses.
- Using the plan as a piggy bank. Withdrawing funds early for emergencies will trigger taxes and a penalty.
- Missing out on free rewards. Credit card programs like Upromise offer perks to 529 account holders in the form of cash-back deposits on select purchases.
Whether you decide to establish a 529 account or some other college savings plan, it’s important that you get started sooner than later to give that investment time to grow.