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Don’t fall for these 6 myths about college savings

from U.S. News & World Report
Jul 26, 2017

Most families don’t understand the true cost of college until their child is a high school senior, and many simply hope for scholarships.

According to a 2017 Sallie Mae survey, 86 percent of families expect their child to attend college but only 39 percent have made a plan to pay for it. When parents don’t save, says Joe Orsolini, founder of Illinois-based College Aid Planners, they still end up contributing in some fashion, such as co-signing a private loan or covering living-at-home expenses while a student commutes.

But last-minute financial planning is stressful. Another recent survey by ScholarShare, California’s state-sponsored 529 savings plan, revealed that parents with a college savings account of any balance felt more confident and less overwhelmed about paying for college than parents who didn’t have an account.

In other words, taking action offers peace of mind. Here are six myths that can get in the way of saving for college.

[Discover the pros and cons of college savings plans.]

  • College is a long way off. Perhaps, but time flies. Linda English, senior director at TIAA Tuition Financing, Inc., which manages ScholarShare, says certain milestones – including a child's first birthday and transition to kindergarten – can remind families to save.

    “Then there’s junior high, which is also a wake-up call,” English says. But starting early and saving often, even if only $25 a pop, allows the benefit of earning compound interest. Plus, as kids get older, they get more expensive – think braces, club sports and car insurance.

    “If you don’t do anything, you’ll never find a way to shoehorn college savings into your budget,” Orsolini says.

  • I don’t really get investing. The tax-advantaged educational investment accounts known as 529 plans are designed for all income levels and financial awareness. Most offer an age-based option that starts out with aggressive investments when children are young and gradually becomes more conservative as children age, which is intended to protect owners who don’t understand investing.

    Those who do can take a more active role if they wish. Check your own state’s plan first to see if it offers a tax incentive, says Angelica Prescod, financial advisor at Edward Jones.

[Learn the pros and cons of using a financial advisor for college savings.]

  • What if there’s a market downturn? Investing always carries a little risk, Orsolini says, but if a downturn happens when your child is young, the market has time to recover. If it occurs when your child is older, the investments in an age-based 529 plan will have already moved to more conservative accounts and should be protected.

    Those who don’t want to take any chances can move funds into a 529 money market account or CD once their child has entered high school or college, Orsolini recommends. A financial advisor can help, but you can also call a 529 plan’s help desk directly with questions.

[Find out how you can choose a 529 plan for yourself.]

  • My kid will get financial aid if I don’t save. Maybe, but perhaps not enough. The Free Application for Federal Student Aid counts income much more heavily than savings, allocating 22 to 47 percent toward college costs. The CSS Profile, used by selective colleges, looks even more closely at family finances.

    Parent savings, however, are assessed at a much lower rate on both forms. Colleges expect you to contribute 5.64 percent of nonretirement assets after calculating for the asset shield allowance. That means on $5,000, just $272 would be earmarked for college. “Savings is a small determining piece,” English says. “In reality, the effect of a 529 plan on financial aid is slight.”

    Of course, saving the full cost will have an impact, but you’ll be financially set. What many families don’t understand is that students might not qualify for anything except student loans, which are considered “financial aid,” English says. That’s why college savings comes to the rescue.

  • I don’t have enough to start saving. “People think they need to come up with a big chunk to start saving, but that’s not the case,” Orsolini says. Opening a 529 plan requires a small amount, as low as $25 or even $15.

    To find the money in your budget, experts recommend redirecting diaper money when kids are potty-trained or trimming a cable or cell phone package. Prescod suggests getting relatives involved with contributions, such as Gift of College gift cards, rather than purchasing more holiday toys.

  • There’s no way to make a dent in future college costs. The future price tag feels paralyzing, but not saving doesn’t help. “Some preparation is better than no preparation at all,” Prescod says. It’s also easy to feel overwhelmed by how much you should save each month to cover costs. However, families don’t need to save the whole amount, if they can’t. Anything helps.

But, bottom line: “Saving for college is a lot easier in smaller pieces,” Orsolini says. “Ultimately, you are going to write checks. Do you want to write a lot of small ones along the way or a big one when college starts?”

Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.

Reprinted with permission.

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