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How (Not) To Save For College

Saving for college is a topic we constantly come across as financial planners. Over the years, we have seen families make many mistakes in this regard.  Here are the three most common:

 1)    Incurring Unreasonable Costs

One common mistake we see is picking up educational costs that are unreasonable for the parents’ level of income and savings.

 It is increasingly common to see pre-tax (what you have to make to pay for college) costs of one-half million dollars for four years at a private college.  Unless you are making close to seven figures, or have saved aggressively since your child was born, you may impair your own ability to retire by paying for this.  Having the child take out loans, however, is often a crippling blow to their financial future. Think long and hard about whether the cost is worth it—especially if your child can go to a state school for a fraction of the cost.

2)    Not Using a 529 College Savings Plan

Another financial mistake is not using a 529 college savings plan early in your child’s life. These plans allow after-tax money deposits to grow tax free if the money is used for educational costs. You can change the beneficiaries on these plans (for a younger sibling or future grandchild) and even pull your money out (with a small penalty and the usual taxes) if desired. The earlier you start contributing to one of these, the better.  If you start contributing bit by bit when your child is very young, you will have close to two decades of compounding interest by the time your child heads to college.

3)  Not Considering an In-State Pre-Paid Plan

If you live in a state that has a pre-paid tuition plan, and you think that there is a possibility that one or more of your children will attend college in your state, it is crazy not to consider a pre-paid tuition plan.  These plans allow you to lock-in future tuition at current rates--a great deal considering the insane rate at which college tuition grows each year.  Furthermore, most of these plans allow for the amount covered by the plan to be applied towards tuition at schools nationwide, in the case that your child goes to school elsewhere.  If your child receives a scholarship, many of these plans will refund the amount covered by the scholarship or allow for the funds to be used towards costs not covered by the scholarship.