10 College Financial Planning Mistakes Parents Make

A mature African-American man helping his daughter relocate to college dorm

kali9 / Getty Images

Whether you've just had your first child or you're parenting a teen, it’s never too late to make sure your college financial planning is on the right track. Check your current plans against our list of top 10 college planning mistakes and correct your course if necessary. Even if you only have a couple of years before you have to start writing tuition checks, you can make sure you're saving appropriately.

Key Takeaways

  • Procrastination is the biggest mistake parents make when doing financial planning for their children's college.
  • There are a variety of tax-advantaged accounts parents should investigate as part of their planning.
  • It's important to structure savings in such a way as to minimize the effect on the Expected Family Contribution calculation when applying for financial aid.
01 of 10

Failing To Minimize Your Expected Family Contribution (EFC)

The Expected Family Contribution (EFC) is the portion of your family’s income and assets that you’ll be expected to spend in any given year before financial aid kicks in. Essentially, financial aid will only cover the cost of attending college beyond your EFC.

While it makes no sense to try to make less money to receive more financial aid, it does make sense to make sure your child’s savings accounts are titled properly. For example, 20% of the assets in accounts owned by the child, such as ​The Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, are expected to be used annually toward college costs. However, a max of only 5.64% of the assets held in a parent’s name is expected to be used. Even better, none of the assets owned by a grandparent are expected to be used for the child (since there is no place to designate this on the FAFSA form).


Starting in July 2023, the FAFSA form will ask different questions because the EFC is replaced by the new Student Aid Index (SAI) for award years starting in 2023-24. Essentially, it's the same number but meant to reflect that not all families can be expected to pay the EFC.

02 of 10

Ignoring Your Time Horizon

Unlike retirement assets, which most people will slowly deplete over 20 to 40 years, you can expect to use up your college savings account over a much shorter window of two to four years. This means that, unlike with your retirement account, you don’t have the freedom to ride out a temporary hiccup in the investment markets.

While higher-risk investments may be acceptable when you have a decade or more left until you need the money, as you get closer to actually needing to withdraw funds, consider moving towards less-volatile assets. Age-based accounts in Section 529 plans automate this process, making them a great option for parents who have limited time or investment knowledge.

03 of 10

Bypassing Your Educational Tax Breaks

Some of the most generous tax benefits available to middle-class America are meant for college planning. These benefits, which may either come in the form of a tax deduction or tax credit, can save you thousands of dollars for paying college tuition or funding your state’s Section 529 account.

The American Opportunity Tax Credit (formerly known as the Hope Scholarship) is open to individuals with adjusted gross incomes of $90,000 or less ($180,000 if married filing jointly) and provides up to $2,500 per student annually. The Lifetime Learning tax credit pays up to 20% of the first $10,000 in higher education costs and is open to individuals with adjusted gross incomes of $69,000 or less ($138,000 or less for joint filers).

04 of 10

Overlooking Student Loans

Some parents view student loans as an embarrassing sign that they fail to earn enough money or didn’t do a good job saving what they had. While this occasionally may be the case, it is important to realize that college costs are spiraling faster than most Americans can keep up. Properly using the right federal student loan programs can help parents and students finance a college education for 4.99% annually.

Whether or not you think you’ll ultimately borrow money through programs like the PLUS loans, it is still important to fill out a FAFSA form. This is the basic form used by most schools' financial aid offices to determine what you might be eligible for. The worst that can happen is they say no.


In August, President Joe Biden announced via Twitter the cancellation of $10,000 of federal student loan debt for eligible borrowers, and $20,000 for federal Pell Grant recipients.


On Tuesday, Nov. 22, 2022, the Biden administration extended the pause on payments and interest on federal student loans for the eighth time. Borrowers with federal student loans won’t have to make payments, and loans won’t resume accumulating interest, until 60 days after court cases challenging Biden’s student loan forgiveness program are resolved or the Department of Education is allowed to move forward with the program. If the cases aren’t resolved by June 30, 2023, payments will resume two months after that.

05 of 10

Underestimating the Effects of Inflation

Until you understand how fast college costs are spiraling out of control, it is tough to do an adequate job of planning for college. While the broad “cost of living” has increased or “inflated” at a historical average of 2% annually, college costs have risen faster, sometimes much faster.

Understanding proper investment selection and using accounts that are meant to combat inflation, such as prepaid tuition plans, are crucial to making sure a college education stays within reasonable reach.

06 of 10

Getting Too Fancy With Your Investments

Some families insist on non-traditional investments for their child’s education fund, such as planting timber to be harvested when it's time to go to college or trying to corner the market on a baseball player’s rookie card.

These may be fun and unique investments, but it's best if they're part of a broader, more diversified portfolio. Aside from the fact that most of these investments miss the tax-advantaged status other college accounts enjoy, they also can backfire as often as not.

With less than 20 years until you need your college funds, stick with the tried and true. Choose simple investments that get the job done, and avoid investments never meant for college planning.

07 of 10

Choosing Investments With High Annual Expenses

Unfortunately, the cost and expenses of most mutual funds and Section 529 plans seem to require an advanced degree in math to understand. While it might be tempting to overlook this aspect of college planning, making sure your investments are cost-efficient is crucial to ensuring their long-term growth.

While it may not seem like it has a huge effect, an extra 2% in fees may decrease a portfolio’s ending value by up to 40% over 25 years. Excessive fees, even on a well-performing portfolio, will reduce your earnings and increase the amount you’ll have to save to reach your college planning goals.

08 of 10

Using the Wrong College Savings Accounts

You can earmark virtually any type of account, from a checking account at your bank to a Roth IRA, as a college account for your child. Unfortunately,​ though, not all of these accounts are created equal. The same mutual fund bought in one type of account may be subject to greater taxation than if bought in another account. Likewise, one account may hurt your chances of financial aid four to five times more than another.

The first step in choosing the right college account is to get your vocabulary nailed down. You need to know what the different accounts are and their basic features. Familiarize yourself with the types of accounts used to save for college, such as 529 plans, Coverdell ESAs, Roth IRAs, UTMAs, UGMAs, and trusts.

09 of 10

Using Your Retirement Funds to Pay for College

The second most damaging college planning mistake many parents make is using their existing retirement funds to pay for college. In other words, many parents take distributions or loans from their company’s 401(k) or another retirement plan, usually to avoid taking out student loans. To add insult to injury, many parents also fail to continue saving into their 401(k)s or IRAs during the college years.

What makes this mistake so huge is the fact that most parents typically do this sometime between ages 40 and 60. That leaves a short amount of time to make up the depleted funds before retirement kicks in.

If you find yourself on the fence with the decision to raid your retirement plan, just remember this tidbit of wisdom: You’ll always have an easier time getting a student loan than a retirement loan.

10 of 10

Procrastinating: The Worst College Planning Mistake

By far, the biggest college planning sin you can commit is procrastination. From the day your child is born, you’ve got roughly 18 years until you’re going to need to come up with some major cash. Every year you wait to deal with that fact raises your out-of-pocket costs substantially.

The most important first step, one you should start today, is calculating what your future cost will be. This, in turn, will allow you to calculate what you need to save each year to get to that goal.

Now, just because a college savings calculator tells you that you need to save $250 per month doesn’t mean you have to do that or nothing. But, by knowing the number, you stay aware of how every dollar is spent. Even though you might only be able to save $100 per month, knowing your target number will help you to be wise with extra cash when you come across it.

Frequently Asked Questions (FAQs)

How much should I have saved up before college?

This depends on your child's unique situation, but one rule of thumb, provided by Fidelity, suggests that if you are planning to cover 50% of your child's education expense, you should have $2,000 saved for each year of your child's age. That means if your child is 10 years old, you should have $20,000 set aside for college. By age 18, that total climbs to $36,000.

How much can you put in a 529 each year?

As 529 college savings plans are administered by the states, each state will have its own maximum contribution limit. For its part, the IRS limits the maximum contribution to the account as the amount necessary to cover the qualified higher education expenses of the beneficiary (which can be substantial). There is no limit on annual contributions, although gift tax limits should be considered (annual gifts of $16,000 or more must be reported, and count against the donor's lifetime gift tax exemption).

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Student Aid Office of U.S. Department of Education. "Wondering How the Amount of Your Federal Student Aid Is Calculated?"

  2. John Hancock Insurance. "Life Insurance and College Funding," Page 2.

  3. FINRA. "Saving For College: UGMA and UTMA Custodial Accounts."

  4. National Association of Student Financial Aid Administrators (NASFAA). "Q&A on Changes to Federal Student Aid Policy Included in Consolidated Appropriations Act, 2021."

  5. Internal Revenue Service (IRS). "American Opportunity Tax Credit."

  6. Internal Revenue Service (IRS). "Lifetime Learning Credit."

  7. Federal Student aid. "Interest Rates and Fees for Federal Student Loans."

  8. Sallie Mae. "Federal Student Loans."

  9. Twitter. “@POTUS, Aug. 24, 2022 at 11:32 a.m.

  10. Department of Education. “Biden-Harris Administration Continues Fight for Student Debt Relief for Millions of Borrowers, Extends Student Loan Repayment Pause."

  11. National Center for Education Statistics. "Average total cost of attendance for first-time, full-time undergraduate students in degree-granting postsecondary institutions, by control and level of institution, living arrangement, and component of student costs: Selected years, 2010-11 through 2020-21."

  12. Vanguard. "Don't Let High Costs Eat Away Your Returns."

  13. College Foundation of North Carolina. "7 Types of College Savings Accounts."

  14. Fidelity. "Are Your College Savings on Track?"

  15. Internal Revenue Service. "Topic No. 313 Qualified Tuition Programs (QTPs)."

  16. Internal Revenue Service. "What's New - Estate and Gift Tax."

Related Articles