As the reality of college costs comes into clearer vision, many parents begin to consider every possible financial avenue to make their child’s academic dreams come true.
While some routes are better than others, others can have an adverse impact on your family’s financial health. Here are six financial missteps to avoid when college costs are soon approaching.
1. Slowing Down on 529 Account Contributions
Now may not be the time to pull back on contributions you’ve been making to your 529 plan account. In fact, it can be an ideal time to maintain or enhance your commitment, and to increase contributions by inviting friends and extended family to join you in the savings process.
Even with college years just around the corner, there will still be many gift-giving occasions before enrollment begins and until a degree is ultimately obtained. In addition to birthdays and holidays, special occasions like awards and graduation ceremonies are excellent opportunities to invite loved ones to contribute toward your child’s educational pursuits. Even small contributions can make a difference with the costs that await you, and those who care about your child may welcome the opportunity to lend a hand.
And don’t forget that employers are also able to contribute to your 529 plan account(s) as an employee benefit. Some are adding 529 matching dollars as part of employee wellness programs. Be sure to ask your employer if they are currently offering 529 benefits and if not, whether they’d be open to doing so. It can’t hurt to ask.
2. Delaying FAFSA or Not Completing It at All
Completing the Free Application for Federal Student Aid (FAFSA) is critical for securing federal grants, scholarships, work-study opportunities, and student loans. Unfortunately, many families delay or fail to complete the FAFSA, missing out on potential financial aid.
It’s important to complete the FAFSA application promptly once it becomes available to get in line for available aid. Even if you don’t think you qualify for need-based assistance, completing the FAFSA can open doors to merit-based scholarships and/or other funding opportunities.
3. Ignoring Scholarships
Many students miss out on free money by not applying for scholarships. While getting selected may seem like a far reach, scholarship awards are one of the best ways to help reduce college costs. Since scholarships do not need to be repaid like student loans, they are well worth pursuing. Many are based on factors that go beyond academics, including extracurricular activities and unique interests and skills.
4. Limiting College Options
Failing to develop a balanced list of options to which your child applies and instead, being laser-focused on just a handful of “dream schools” can be unwise and costly. Certain highly sought-after institutions can come at a substantially higher net cost which can result in years of student loan repayment.
By keeping an open mind, your child may receive offers of admission from one or more schools that offer excellent programs along with generous financial aid packages.
5. Using Retirement Accounts or Home Equity
Withdrawing money from retirement accounts may seem like an easy solution to help pay for college, but it can be a risky financial move. Early withdrawals can come with penalties and tax consequences, and you may lose out on years of compound interest.
Similarly, using home equity to pay for college can put your home at risk if you’re unable to repay the loan. Both borrowing from retirement accounts and leveraging home equity can adversely impact your financial well-being in your later years.
6. Relying Too Heavily on Student Loans
While student loans can bridge funding gaps, relying too heavily on loans can lead to overwhelming debt. Over-reliance on loans can limit your child’s financial flexibility after graduation and may delay their ability to live independently, begin to save for retirement, purchase a home, and/or pursue other adult goals.
Co-signing private student loans can also be risky. As a co-signer, you’re legally responsible for the loan if your child can’t make payments. This could damage your credit score and affect your ability to borrow for other financial needs. Many graduates and their parents struggle with repayment. Carefully consider what the reality of student loan repayment may look like for your family before borrowing large amounts.
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