The main reasons?
Parents neglect getting informed guidance from those who can help them, like their financial advisors, and make many planning mistakes, including failing to take advantage of tax-favored programs like 529 plans.
Legg Mason’s 2012 Intergenerational Survey of College Finances documents how parents struggle to provide for college, as tuition and college debt continue to rise to unprecedented levels. Legg Mason reports that “parents are striving to pick up a bigger portion of the college tab than their parents before them,” but that is a goal that becomes increasingly more difficult with rising tuitions.
Affluent parents make key mistakes
Legg Mason found that parents have “good intentions” but stumble when it comes to strategically planning for college expenses.
What mistakes do affluent parents make?
- They underestimate total college expenses
- They start the planning and saving process too late
- They pick the wrong investment strategy
- They fail to take full advantage of the best strategies and plans, like 529 accounts
- They naively count on receiving funds from other sources, like scholarships and family gifts
How to do it the right way
Make sure to talk to your financial advisor as early as possible about your kids’ college funding goals. Your advisor can help define in dollar terms how much your college dreams will cost, and provide you with a realistic estimate of how much you’ll need to save to make those dreams a reality. They can also help you save in the smartest way possible to take advantage of tax savings, and determine the most appropriate investment strategy.
In working with parents over the years, we’ve seen all kinds of regrettable – and very avoidable – missteps. Some of the most common? Parents often save in their child’s name using a custodial account. While that was an effective strategy years ago, it now has very negative tax and financial aid repercussions. Other parents commit big tax no-no’s like taking money out of their own retirement accounts to pay for college. Many well-off parents pay hefty income tax bills, while overlooking the huge savings they could gain from tax-sheltered 529 accounts. Still others bravely insist on paying full-fare private college tuition bills, oblivious to the fact that their own retirement security is in tatters. These are all areas where a qualified financial professional can direct parents back onto a better path.
Ultimately, planning for college in the smartest way possible isn’t just about your child. It’s about you and how well you prepare yourself for the biggest financial challenge of all – your retirement years. As the Legg Mason study points out, when parents plan poorly for their children’s college years, their actions have the potential to derail the parents’ own long-term financial plans and lifestyle in retirement.
A financial tip to consider: Do you already have 529 accounts set up for your children or grandchildren? Over half of parents surveyed by Legg Mason said they would consider putting money into their child’s 529 college savings plan in lieu of a present. You might want to suggest to grandparents, and other family and friends to consider gifts to your child’s 529 plan instead of other birthday or graduation gifts.