College Savings: Common Mistakes Parents Make

Last Updated May 25, 2011 9:27 AM EDT

In the spirit of commemorating 529 College Savings Day (May 29th), I decided to check in with Jeff Howkins, president of Sallie Mae's Upromise Investments. (His organization administers 31 of these plans in 17 states.) I wanted to get his take on the common mistakes parents make while trying to save for a child's education.

Below is an edited version of our conversation. In an effort to keep this brief, please note that I took the liberty of shortening and paraphrasing Howkins' answers.

College Savings Mistakes 101
QUESTION: What's a common mistake parents make when it comes to saving for college?
ANSWER: Many parents start feeling so intimidated and discouraged that they don't plan for their child's college education. I think parents need to start educating themselves. If they check out 529.com, they can read about the different college savings plans.

QUESTION: In addition to not planning, what's another mistake parents make?
ANSWER: According to our How America Saves for College survey, a large percent of parents think of their 401(k) accounts as part of their college savings plan. This is a terrible idea because they're robbing their retirement to pay for their kid's education. It's also a bad strategic move because that money is considered income and the following year it will count against families when they apply for financial aid.

QUESTION: Many parents with teenagers didn't open 529 accounts because they were relatively new when their kids were little. Instead they have custodial accounts. Any reason parents should consider transferring the funds into a 529 now?
ANSWER: Yes, 529 plans have many benefits, including some tax advantages. But it's also important to realize that a 529 account allows parents to maintain some control of the money. When savings is stashed away in a custodial account, those funds become the child's property when he reaches age 18 or 21, depending upon the state. At that point, your child can choose to do anything he wants with the money. Transfer the investments into a 529 plan and the cash must be used for education.

(Note: If you open a new 529 plan for your child, you're the owner of the account. If your youngster chooses not to go college, you can transfer the fund to another kid or even use the cash for your own education.)

QUESTION: Grandparents and other relatives often like to gift their loved ones money for college. What's an easy way for them to contribute to a 529 plan and not, say, buy a savings bond?
ANSWER: If you have a 529 plan that's administered by Upromise Investments, parents can set up a Ugift account. This is a service that makes it easy for family and friends to contribute money directly into a college savings plan.

Grandparents can also open up a 529 plan for their grandchildren.

Are you guilty of making any of these mistakes?

Stacey Bradford is the author of The Wall Street Journal Financial Guidebook for New Parents.
Pomp and Circumstance image courtesy of Flickr, CC 2.0
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  • Stacey Bradford

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