College planning is no simple task. There are plenty of moving parts and mountains of paperwork, not to mention deadlines. The fact is, if you don’t do it right, it could cost you thousands more than it should. Over many years of guiding clients through the college planning process, we’ve identified the most common mistakes people make. By understanding these mistakes, you can also learn how to avoid them. College is expensive enough as it is, so keep these 5 college planning mistakes at the top of your mind as you start thinking about your child’s future education.
Mistake #1 Not Knowing Your Expected Family Contribution (EFC)
The EFC is calculated based on the financial information you provide on the FAFSA (Free Application for Federal Student Aid). It’s the amount the government assumes a family will be able to pay towards the student’s college costs and it affects how much your child will receive in financial aid.
The FAFSA is complicated, but if you plan ahead you can change your outcome by making strategic adjustments. Your EFC is made up from a formula of 7 different factors and two different formulas.
Not knowing your EFC is a major mistake because, in order to maximize your financial aid, you may need to start making financial changes years in advance. Start thinking about your EFC as soon as you start saving for college. Your Financial professional should be able to fairly accurately estimate your EFC many years before college so as to maximize your family’s specific situation. Knowing what your EFC is for each methodology is very helpful so that you know what to expect from each type of school. Don’t rely on the accuracy of most of the EFC calculators on the college’s websites as most of them do not go into the specifics on the assets or the methodology. Ask a Financial professional who is knowledgeable about this.
Mistake #2 Not Saving In The Right Accounts
You aren’t limited in your options to save for college, but all savings vehicles are not created equal. There are no good or bad Financial vehicles – they all have different purposes and functions. For example, retirement accounts such as IRAs or 401(k)s are not counted as assets on the FAFSA. Any liquid assets will increase your EFC as will 529 plans. Any assets in the name of your dependent child’s name will actually count much more against you than if they were in the parents’ names. Beware too of 529 plan money in the grandparents’ names because even though that will not count against you as an asset, when they send money to the college it will be counted as income on the next year’s FAFSA form.
See:529 Plans – 6 vital things I need to know
If you save in a Roth IRA and end up having money left over after college, you can use it for your retirement, but make sure you have the timing right on this account or you could end up paying penalties.
The takeaway here is to weigh your options, do your research, and work with someone knowledgeable in college savings vehicles so you don’t make a mistake that could cost you tens of thousands of dollars and you might regret down the road.
Mistake #3 Robbing Your Retirement
At College Planning America, our goal is to help your child leave the nest without taking your nest egg with them. A crucial piece of our college planning process is to analyze your retirement savings and determine if there are other options to pay for college rather than using the money you will need when you reach that retirement milestone.
Too many parents withdraw money from their various retirement accounts to help their children out rather than see their kids burdened by student loans. Sometimes parents pause contributions into their retirement accounts while their child/children are in school in order to pay tuition bills.
There are two reasons why it is critical to avoid this mistake. First, except for certain circumstances, early contribution withdrawals from a traditional IRA or other pre-tax retirement accounts will result in a 10% penalty and taxes. Roth IRAs have more flexibility and allow you to withdraw contributions without penalty, but not without long-term consequences.
Second, and most importantly, when you draw from your retirement savings to cover college costs, you lose out on the growth potential. Depending on how old you are, you may never be able to rebuild your savings. It may seem convenient to use your retirement savings in this way, but you are robbing your future retirement to do so.
College is a huge learning opportunity for us with our kids and what we teach them in the planning process could influence how our students handle their own planning. If we spend our retirement money on their college, it could be that we might rely on our kids for financial support later in life and that might not be what we or they would want.
Remember that you can borrow for college, but you cannot borrow for Retirement!
Mistake #4 Ignoring The Big Picture
It’s easy to get lost in the frenzy of visiting and choosing colleges, but if you don’t begin with the end in mind, you might not make the right choice. With so much time, energy, and money invested, doing the legwork up front could make all the difference for your family. Many people focus on the big college names or the idea of a dream school. But since college is a stepping stone into the rest of your child’s life, you want to make sure they are matched with the right school and the right program to maximize their future career success.
An alternative to prioritizing the college of choice is to first start with a career focus and their natural giftedness, then look at majors that will get your child to their career, then choose a college that fits those parameters. Don’t forget to research graduation rates and placement opportunities into your child’s field of study. At College Planning America, we recognize the importance of college choice and have created a college visit scoring system that helps you make an informed decision. We also provide a personal student advisor to guide your child in a customized college search to match their career choice.
Mistake #5 Procrastination
If you are a parent, then you know firsthand how quickly time flies by. You may be enrolling your child in preschool today, but before you know it you will be moving them into their dorm room. You only have 18 years to save for child’s college education, one of the most important investments you can make, and every year you wait you lose out on the magic of compound interest. The best time is to start the day your child is born.
If you don’t have a college plan in place, we would love to help you with every step of the process. Click here to take our college planning strategy quiz and email me at dcoen@sageviewadvisory.com or davec@collegeplanningamerica.com or call 800-814-8742 to set up a no-obligation conversation.
About Dave
Dave Coen is a Financial Advisor with SageView Advisory and the CEO of College Planning America. Along with his financial industry experience, he is a College Planning Specialist and has served on the advisory board of a national College Planning training organization. He works closely with individuals and families to provide them comprehensive financial planning that addresses all elements of their financial picture. Learn more by connecting with Dave on LinkedIn.
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