Top 9 College Planning Mistakes Parents MakeSubmitted by Heath Wealth Management - Elijah Heath on December 17th, 2020
When it is time to start thinking about saving for your child’s college fund, it is easy to become overwhelmed, frustrated, or even give up before you get started. At Heath Wealth Management, we know parents may be worried about a little “m” mistake they have made. We want you to know we focus on capital “S”, bold Solutions!
Mistake: We didn’t start saving for college when our child was born, so it’s probably too late to start.
SOLUTION: You can start saving any time for your child’s education. The goal is to determine the realistic amount you are able to save and the amount needed for college. A CERTIFIED FINANCIAL PLANNER™ can help you review reasonable goals for what you want to do. You should discuss whether you want to save enough to pay all or part of four years of tuition, and what extras you want to include such as books, fees, dorm, or other living expenses.
When you start saving plays some role in how much you are able to accomplish. At Heath Wealth Management, we show our clients how different savings strategies can grow their funds, give them tax advantages, and be strategic when considering their Expected Financial Contribution (EFC) amount for financial aid.
Another option is to ask family members to contribute to your child’s education fund - instead of buying gifts for their birthday or other holidays - to help fill in any gaps, you may have identified.
Mistake: We’re going to wait until high school to figure out what to do for our child’s college plans.
SOLUTION: A financial planner can help you set up a 529 plan when your child is born, even if you are not certain whether they will ever go to college. This plan offers education opportunities to your children and grandchildren since beneficiaries can be changed, with additional tax advantages to parents and grandparents as the funds grow.
Parents can even choose to go back to school or receive other kinds of education later if none of the children use that money for their own education. Imagine going to Spain for a year to learn to speak Spanish among the locals or moving to Paris to take art or cooking lessons. Legitimate education opportunities can be paid for by a 529 plan both in the US and abroad. This plan does not have mandatory withdrawal dates, which makes it an ideal lifelong learning plan.
Waiting too late to make college choices can add additional stress on a family if deadlines or missed or the funds have not been set aside. Talk to your planner about flexibility and growth opportunities when discussing your child’s college plans.
Mistake: We set our goals on a top Ivy League college without checking tuition and other costs.
SOLUTION: Your financial planner can show you college planning tools that have all the costs associated with specific colleges. If your goal is an exclusive out-of-state college, your CFP® can determine the monthly savings contribution needed to make that dream come true.
If that specific college goal is not realistic for your family, then ask your financial planner to match the right college to the funds you are able to save. No family should face massive debt upon graduation or raid their retirement funds to send a child to college. The best solution is to determine your contribution amount and choose matching college opportunities for your child to review.
Some families assume they cannot get a quality education at an in-state public college without researching further. Be open to the right solution for your family.
Mistake: We checked tuition rates years ago and now realize we haven’t saved enough to pay for today’s actual rates.
SOLUTION: Tuition inflation rates are between 5% - 8%, well above average inflation of 2.5-3%. Your financial planner has tools to guide you to the best savings and investment options to match your college savings plans, based on inflation-adjusted costs. They also consider all facets of your goals, including future tax implications and possible penalties for early withdrawals.
When you work with a CFP®, they have a fiduciary responsibility to recommend products and investments that work for you. Parents should meet with their financial planner to review their goals every year to ensure changes can be made when needed.
Mistake: We don’t want our child to have a bunch of college debt, so we’ll just use our retirement account to pay for college.
SOLUTION: Student loans generally make more sense than taking money from parents’ retirement accounts. By the time a child enters college, most parents are at least half-way through their working years. That means they have much less time to repay the money they take from retirement, and certainly have reduced ability to make contributions above and beyond to grow their retirement accounts.
Students have their entire working career ahead of them. With careful planning of college savings, financial aid opportunities, and picking the right college based on reasonable costs, a student loan should be a manageable expense for them. Additionally, parents may be able to help repay some of the student loan, easing their burden as well. Remember, you can take out a loan for your child’s college, but you do not want to take out loans in retirement.
Mistake: We set up accounts in our child’s name to save for college and kept all our personal savings in a bank account. Now our Expected Family Contribution (EFC) is much higher than expected.
SOLUTION: This is one of the primary reasons to work with a financial planner early. They can guide you on how money and other assets are held, both in your child’s name and parents’ names, knowing this plays a big role in the financial aid process.
For example, retirement accounts such as IRA’s or 401(k) plans are not counted as assets on the FAFSA (Free Application for Federal Student Aid). Likewise, grandparents who set up 529 plans for their grandchildren will not have that money counted against them (although it will be considered income on the FAFSA the following year). UTMA accounts will have 20% of the balance counted as an asset. It is very important to let your advisor assist you with what money can be associated with your child.
Your CFP® can help you understand the types of college savings accounts (529 plans, prepaid tuition plans, Coverdell ESA, Roth IRA, UTMA/UGMA, and trusts) and choose the best ones for you.
Mistake: Our family income is too high to bother completing the FAFSA form (financial aid).
SOLUTION: Always fill out the FAFSA form! Never assume you will not qualify for any financial aid. It does not take very long to complete the form online and even a small amount of financial aid helps.
Would you say, “No, thank you” if someone wanted to hand you $500 or $1000 to complete the FAFSA form? Of course not. Even if you expect to take out a student loan to assist with paying for college, or you have college savings for your child, it is still important to fill out the FAFSA form.
Mistake: We’re hoping our child will get a scholarship, so we don’t need to worry about saving for college.
SOLUTION: Scholarships are an excellent benefit in terms of paying for college expenses. There are several different kinds and all of them have requirements to keep the scholarship. It is important for the child and parents to carefully review all scholarship offers and determine if it is realistic to maintain. Some statistics show up to 50% of students lose their scholarships once they start college, so parents need to have financial plans in place if that occurs.
While some scholarships offer a “full-ride” (tuition, books, fees, and dorms), most families find they need to cover at least part of college costs. Some colleges may offer a significant scholarship amount, but the remaining college costs are still higher than your college savings plans can cover at that particular school. Ask your financial planner to review scholarship offers and compare them against your plans.
Mistake: We told everyone our child was going to a prestigious college, only to realize years later our child didn’t share that same goal.
SOLUTION: This is not an uncommon dilemma when college savings decisions are made early in a child’s life, then parents forget to revisit these goals annually. College savings and plans need to be flexible. Maybe they dreamed their child would become a lawyer or doctor, only to realize their child had skills and dreams of being an artist or computer programmer. If the child’s intended major, skill sets, or academic achievements do not match the “dream” college, things can become difficult.
Your financial planner, like Elijah Heath, CFP® at Heath Wealth Management in Florida, can help parents and grandparents set up 529 education plans, UTMA (Uniform Transfer to Minors Act) accounts, and prepaid tuition accounts, for example, to help with the goal of secondary education while remaining flexible on the when, where, and what they study.
DON’T SPEND YOUR GOLDEN YEARS WORKING AT THE GOLDEN ARCHES
At Heath Wealth Management, we show our clients how to plan for their child’s college years while not being so single-minded as to overlook their own retirement. We take the time to explain all your options carefully and schedule regular phone calls or meetings to stay on track with your goals. A CERTIFIED FINANCIAL PLANNER® like Elijah Heath, can provide that peace of mind and financial strategy to keep you from spending your golden years working at the golden arches. Call or email us today to learn more:
813-556-7171 or email Elijah.Heath@LPL.com.
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