5 College Savings Mistakes That Could Cost You Thousands

Saving for college seems straightforward—open an account, put money in, watch it grow—but many families make costly mistakes along the way. Worse, they might leave your child without adequate funds for college.

Don’t worry. Most mistakes are easily avoidable once you know what to watch for.

Mistake 1: Waiting Too Long to Start

A big mistake families make is delaying their college savings. Many parents think they’ll start “when they have more money” or “when the kids are older.”

This costs you the most powerful tool in investing—time.

Currently, only 35% of families use college savings accounts. Many wait too long to begin their planning.

Mistake 2: Choosing the Wrong Account Type

Not all savings accounts work equally well for college expenses. Regular savings accounts offer safety, but limited growth potential. Taxable investment accounts create yearly tax bills that can reduce your overall returns.

529 college savings plans provide a great combination of growth potential and tax benefits. Your money grows tax-free, and withdrawals for education expenses avoid federal taxes entirely.

Yet, just over half (54 %) of U.S. parents remain unaware of 529 savings programs. This lack of awareness costs families significant tax savings over time.

“Many families use regular savings accounts when they could benefit from 529 plans,” notes Rafe Klein, Senior Vice President of Investments at David Lerner Associates. “The tax advantages add up to substantial savings over 15-20 years.”

Mistake 3: Being Too Conservative with Investments

Fear of losing money leads many parents to choose overly conservative investments. They may put college funds in savings accounts or money market funds earning less than 1 to 2% annually.

This approach virtually guarantees you’ll lose purchasing power over time. College costs have increased around 5% per year from 2000-2022. If your savings grow at 1 to 2% you fall further behind each year.

For children under 10, growth-oriented investments make more sense. You have time to ride out market fluctuations. As college approaches, gradually shift toward more conservative options. Work with a knowledgeable investment advisor to help you decide on the best approach.

Mistake 4: Saving for College Before Your Own Retirement

This mistake is the result of good intentions but can create long-term problems. Parents sacrifice their retirement savings to fund their children’s education.

Remember this key principle: your child can borrow for college, but you cannot borrow for retirement.

Investment advisors recommend this order of priorities:

• Emergency fund (3-6 months of expenses)
• Company 401(k) match (“free money” you shouldn’t leave behind)
• High-interest debt payoff
• Additional retirement savings
• College savings

Following this sequence ensures your family’s overall financial health.

Mistake 5: Not Understanding How Financial Aid Works

Many families avoid saving because they worry it will hurt their financial aid eligibility. This misconception costs them years of potential growth.

Here’s the reality: 529 plans owned by parents have minimal impact on financial aid calculations. The account counts as a parental asset, assessed at a maximum rate of 5.64% in aid formulas.

Student assets face much higher assessment rates (up to 20% for dependent students). This makes parent-owned 529 plans more favorable than accounts in the student’s name.

Don’t let financial aid fears prevent you from saving. The benefits of accumulated savings typically outweigh any potential aid reduction.

How to Fix These Mistakes

If you’ve made any of these errors, you can still correct course:

• Start saving immediately, regardless of your child’s age. Late is better than never.
• Research 529 plans in your state. Look for low fees and good investment options.
• Choose age-appropriate investments. Use growth investments for young children, becoming more conservative as college approaches.
• Maximize your retirement contributions before focusing heavily on college savings.
• Learn the real impact of savings on financial aid. Don’t let misconceptions guide your decisions.

College Savings Month provides the perfect opportunity to review your strategy. Fix any mistakes you’ve identified and get your savings plan back on track.

Your future self will thank you for taking action today. Avoid these common mistakes and give your child the best chance for an affordable college education.

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Material contained in this article is provided for information purposes only. It is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. These materials are provided for general information and educational purposes, based on publicly available information from sources believed to be reliable. We cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.