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By Mari Adam
December 22, 2015

My clients often tell me that saving for college is their most important financial priority. Like other parents, they know how much a college degree can cost, and they’re prepared to make some sacrifices to ensure that their kids get a good education.

That’s why it hurts so much to see the mistakes some parents make in saving for college. Here are three of the most common—and damaging—mistakes I’ve seen in my 25 years as a certified financial planner professional, plus some advice on how to fix them.

Mistake #1: Playing It Too Safe

According to Sallie Mae’s 2015 report “How America Saves for College,” the majority of U.S. families put their money in low-risk, low-return options like savings accounts, checking accounts, and certificates of deposit.

While that undoubtedly helps them sleep at night, it won’t go far in paying those future college bills, which are already sky high and growing at an estimated 5% per year on average.

These parents are making a classic investment mistake. They’re using investments designed for short-term stability to fund long-term growth. The result? They’ll fall way short of the mark.

Over the last 10 years, you would have earned an average 1.85% per year from a savings account or CD, according to Morningstar. That’s not nearly enough to keep up with college inflation, and it’s a fraction of what you might have earned with a moderate investment portfolio combining stocks and bonds, such as those offered by 529 college savings plans. And that’s even after accounting for the big 2008 stock decline.

The Fix: If you can’t stomach any market turbulence, at least consider moving your no-pain, no-gain savings to a 529 college savings plan, which will save you the annual tax bite (529 plans offer tax-free growth when the assets are used for qualified college expenses). You can find a list of state plans that offer FDIC-insured investment options at SavingForCollege.com. Or, for a bit more growth, use an age-based account if your 529 plan offers one; it becomes more conservative as your child gets older, minimizing the risk that it will lose value when those college bills start coming due.

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Mistake #2: Playing in the Minors

Years ago, one of the best ways to save for college was with a custodial or minor’s account, known as an UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act) depending on your state of residence.

You could put money into one of these accounts for your child, pick your own investments, and benefit from the child’s lower tax bracket.

Unfortunately, the tax rules changed, making these make custodial accounts less attractive for most families. Under current law, the account’s earnings above a certain level are taxed at the parent’s highest marginal rate instead of the child’s lower rate, until the child’s 24th birthday. For higher-earning parents, that means one-third of your yearly account growth will go to the IRS instead of the college of your choice.

What’s more, any money you hold in a custodial account is considered an asset belonging to the student and counts heavily against you in financial aid calculations.

The Fix: If you’re among the 10% of parents who are still saving for college using a custodial account, consider moving those assets into a custodial 529 savings plan. The money will grow tax-deferred, unlike an UGMA or UTMA. You’ll also minimize the negative financial aid impact because 529s are treated much more favorably. Before you liquidate the investments in an UGMA or UTMA, however, check on whether you’ll incur any early withdrawal penalties and be aware that you may owe taxes on your capital gains.

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Mistake #3: Not Saving at All

Of course, the biggest mistake you can make is not saving for college at all.

More than half the families surveyed by Sallie Mae have no college savings. Some say they don’t have enough money, while others admit they just haven’t gotten around to it yet.

Many parents mistakenly believe financial aid will cover all college costs (it usually won’t), or assume that their savings will count against them in financial aid formulas. They should understand that most aid comes in the form of loans, not grants, and that it’s much cheaper to save now than to borrow later. And in financial aid calculations, the biggest impact comes from what you earn, not what you’ve saved.

The Fix: The best way to keep college savings on track is to start early and save regularly via payroll or other automatic deductions.

Mari Adam is a certified financial planner with 25 years of experience helping clients in South Florida and across the U.S. Her firm, Adam Financial Associates, based in Boca Raton, specializes in providing fee-only financial planning and investment services to women, executives, and individuals planning for retirement.

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