_Don’t let these common misconceptions keep you from saving for your child’s future_
Although most parents are aware of the importance of a college education, myths about saving for college may keep them from starting an investment plan. Don’t let these common myths keep you from investing in your child’s future
h3. 1. If your child decides not to go to college, you will lose your savings.
Some tax-advantaged college savings plans, such as 529 plans or Coverdell ESAs are designed to be used only for education expenses. However, unused 529 plans and Coverdell ESAs can be switched to another beneficiary (such as a sibling) without penalty. The savings can also be used for non-education expenses; however the earnings will then be subject to income tax and a 10% penalty. While there are advantages to these college savings plans, there are other ways to save for college without designating the money for education only. Savings bonds, mutual funds, and savings accounts are all options for setting aside money toward your child’s future college education.
h3. 2. If your child earns a scholarship, he won’t need your college savings.
Scholarships, even “full scholarships,” do not cover all college expenses. Money in a college savings plan can be used for many eligible college expenses such as books, equipment, and room and board. It can also be used for graduate school (Coverdell ESAs must be used by age 30, 529 plans have no age limit). Savings that are not in a specific college savings plan can be used for any other expenses that come up, either for your child or yourself. It’s never a bad idea to have money in savings.
h3. 3. Having college savings will make your child ineligible for financial aid.
College savings will impact your child’s financial aid eligibility, but not as much as you may think. For instance, 529 plans, Coverdell ESAs, and other savings in the parent’s name are considered to be parent assets. When applying for financial aid, parent assets are assessed at a scale going up to 5.6%. Student assets are assessed at a flat 20%. To minimize the impact on financial aid, college savings should be made in a parent’s name. Better yet, college savings that are put in a grandparent or other relative’s name are not considered at all when applying for financial aid.
h3. 4. You must go through a financial adviser to set up a 529 plan.
Financial advisers can help you choose a 529 plan, but you do not need to go through an adviser or broker to set up an account. Many states offer plans that can be bought into directly. Direct sold 529 plans often have lower fees and will have no sales commissions. To find out more about 529 plans or see the details of specific plans, visit the College Savings Plan Network (collegesavings.org). When searching for plans by state, each plan will be marked as either “Direct Sold” or “Adviser Sold.”?
h3. 5. It’s too late to start saving for college.
It’s never too late to start saving for college. While starting when you child is very young will give you more time to build up the savings slowly, that should not stop you from starting a college savings plan for your older child. You will pay for college as you go, so there is always time to continue saving for future years even after your child starts school. Even if it doesn’t cover the full cost, every bit of savings will help. A financial adviser can help you choose the best plan for college savings based on the age of your child.