You want to do right by your kids. But if you make the wrong
moves with the money you've set aside to help them, much of your
hard work could end up going to waste.
Keeping it together
Juggling the financial needs of your children with the rest of your
family finances isn't easy, especially nowadays. But when it comes
to saving for their children's college education, a lot of parents
are making mistakes that are keeping their money from working as
hard as it could for them. Let's take a look at some of those
mistakes, along with the better way to handle the challenges that
Mistake No. 1: Giving up on 529 plans
should be the perfect solution for college savings. Working similar
to retirement plans, 529s let you set aside chunks of money on a
tax-deferred basis, letting income and capital gains accumulate
within the account until you use them for college expenses. Use
that money for college bills, and that income becomes
, magnifying their value.
The problem, though, is that gains in 529s have been hard to
come by lately. With most 529 plans having big allocations to
stocks, tough markets over the past decade have severely limited
the amount of growth most parents have seen in their plan accounts.
High costs among some plans
have made good performance even rarer.
As a result, parents are reducing their 529 contributions.
According to the Financial Research Corporation, the average parent
is setting aside barely $200 a month, down over 20% from a year
ago. New account openings are down by more than half this year.
Although it takes some looking, there
good 529 plans
out there, with low costs and good investment options. And although
the stock market hasn't been kind to savers lately, those with a
long time horizon before their kids reach college have enough time
to ride out these tough times and can expect better returns
Mistake No. 2: Using retirement funds to pay for college
Paying for college is a sacrifice many parents are willing to make.
But you shouldn't sacrifice your own retirement for it.
Nevertheless, that's what many people are doing. A survey from
) and Gallup showed that a quarter of parents expect to dip into
their retirement accounts to pay for college.
That's a bad idea on a number of fronts. First, retirement
assets ordinarily aren't included in financial aid considerations,
but withdrawing from retirement accounts increases parents' income
and reduces financial aid. Second, although there's no 10% early
withdrawal penalty for IRA withdrawals used for higher education,
still have to pay income tax if the money came from a traditional
But most importantly, every dollar you take out of your
is a dollar that will never again be available for tax-deferred or
tax-free growth. And given the woeful state of many families'
retirement savings, you may well not be able to afford to take
away from your retirement accounts.
Mistake No. 3: Investing too conservatively
Another Sallie Mae study shows that many college savers are looking
for safe investments rather than ones that will grow. Although they
come with FDIC insurance, these bank-offered products don't pay
high enough interest right now to help people reach their
For the financial institutions involved, college savings are a
reasonable way to gain assets.
(Nasdaq: ZION) ,
(Nasdaq: FITB) , and
) are among banks offering or planning to offer FDIC-insured
products for 529 plans. Sallie Mae markets a high-yielding savings
account both to college savers and the general public.
appropriate if your kids are close to college age. But if you still
have a while to go, the question is whether earning just a few
percent will give you the growth you need to afford to pay for
college. Unless you can save huge amounts, the answer is likely to
Mistake No. 4: Counting on loans
Despite their parents' best efforts, many students end up needing
student loans. But counting on them can be a costly mistake.
A lot depends on what kind of loan you get. Government-sponsored
loans often come with reasonable terms and rates. But private
loans, which big banks like
) offer, can come with much higher costs and interest, depending on
your credit quality. Counting on private loans can add years to
your child's debt obligations, making it that much harder to get a
fresh start after graduation.
Make the right moves
If you're fortunate enough to be able to put money aside for a
college education for your kids, don't waste the opportunity. By
being smart with your investments, you'll get the maximum payoff
for your efforts.
Stay tuned each Wednesday this month as Dan goes through the
ins and outs of saving and paying for college.
True to its name, The Motley Fool is made up of a motley
assortment of writers and analysts, each with a unique
perspective; sometimes we agree, sometimes we disagree, but we
all believe in the power of learning from each other through our
Fool contributor Dan Caplinger tries to learn from others'
mistakes instead of his own. He doesn't own shares of the companies
mentioned in this article.
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when it was a kid.
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