Next to housing costs, paying for college may be the most significant financial commitment Bay Area families face. The average cost of attendance at public schools this year is $20,000 and for private, closer to $40,000 – for four years that is $80,000 to $160,000 per child! With this level of commitment, it is critical that parents have a college saving strategy that avoids these costly college saving mistakes.
Procrastinating – Media messages about rising college costs can be overwhelming. Many parents I speak with wonder how they will ever save enough and often this stops them from saving anything at all. Just like with retirement saving, the key to college saving is to start now, start small and make it automatic.
Over-funding 529 accounts – If you are getting started with your college savings strategy, the 529 account is one of the best places to begin. It offers tax-free growth, few limits on the source and amount of contributions and can be a financial-aid friendly asset. However, 529 funds must be used for qualified higher education expenses. Withdrawals for any other purpose result in taxes and a 10% penalty on gains.
Saving in the name of the student – For financial aid, 5% of parent assets are assessed vs. 20% for student assets to calculate the Expected Family Contribution (EFC). So $100 in the student’s name could cost $15 in financial aid awards.
Not communicating with key partners (your student, grandparents) about your college saving strategy – Setting budget-appropriate expectations with your student can alleviate stress when selecting and paying for college. Grandparents could consider gifting to your student’s 529 plan instead of to the child directly.
Taking too much investment risk – An aggressive investment strategy selected when your student was in pre-school, and college was in the far distant future, should be revised as the college years approach. By the time your child is entering high school consider moving most of your designated college savings to bonds and cash.