You want to do right by your kids. But if you make the wrong moves with the money you've set aside to help them, much of your hard work could end up going to waste.

Keeping it together
Juggling the financial needs of your children with the rest of your family finances isn't easy, especially nowadays. But when it comes to saving for their children's college education, a lot of parents are making mistakes that are keeping their money from working as hard as it could for them. Let's take a look at some of those mistakes, along with the better way to handle the challenges that they raise.

Mistake No. 1: Giving up on 529 plans
529 plans should be the perfect solution for college savings. Working similar to retirement plans, 529s let you set aside chunks of money on a tax-deferred basis, letting income and capital gains accumulate within the account until you use them for college expenses. Use that money for college bills, and that income becomes tax-free, magnifying their value.

The problem, though, is that gains in 529s have been hard to come by lately. With most 529 plans having big allocations to stocks, tough markets over the past decade have severely limited the amount of growth most parents have seen in their plan accounts. High costs among some plans have made good performance even rarer.

As a result, parents are reducing their 529 contributions. According to the Financial Research Corporation, the average parent is setting aside barely $200 a month, down over 20% from a year ago. New account openings are down by more than half this year.

Although it takes some looking, there are some good 529 plans out there, with low costs and good investment options. And although the stock market hasn't been kind to savers lately, those with a long time horizon before their kids reach college have enough time to ride out these tough times and can expect better returns ahead.

Mistake No. 2: Using retirement funds to pay for college
Paying for college is a sacrifice many parents are willing to make. But you shouldn't sacrifice your own retirement for it.

Nevertheless, that's what many people are doing. A survey from Sallie Mae (NYSE: SLM) and Gallup showed that a quarter of parents expect to dip into their retirement accounts to pay for college.

That's a bad idea on a number of fronts. First, retirement assets ordinarily aren't included in financial aid considerations, but withdrawing from retirement accounts increases parents' income and reduces financial aid. Second, although there's no 10% early withdrawal penalty for IRA withdrawals used for higher education, you will still have to pay income tax if the money came from a traditional IRA.

But most importantly, every dollar you take out of your retirement accounts is a dollar that will never again be available for tax-deferred or tax-free growth. And given the woeful state of many families' retirement savings, you may well not be able to afford to take anything away from your retirement accounts.

Mistake No. 3: Investing too conservatively
Another Sallie Mae study shows that many college savers are looking for safe investments rather than ones that will grow. Although they come with FDIC insurance, these bank-offered products don't pay high enough interest right now to help people reach their goals.

For the financial institutions involved, college savings are a reasonable way to gain assets. Zions Bancorp (Nasdaq: ZION), Fifth Third (Nasdaq: FITB), and BB&T (NYSE: BBT) are among banks offering or planning to offer FDIC-insured products for 529 plans. Sallie Mae markets a high-yielding savings account both to college savers and the general public.

Conservative options are appropriate if your kids are close to college age. But if you still have a while to go, the question is whether earning just a few percent will give you the growth you need to afford to pay for college. Unless you can save huge amounts, the answer is likely to be no.

Mistake No. 4: Counting on loans
Despite their parents' best efforts, many students end up needing student loans. But counting on them can be a costly mistake.

A lot depends on what kind of loan you get. Government-sponsored loans often come with reasonable terms and rates. But private loans, which big banks like Wells Fargo (NYSE: WFC), Citigroup (NYSE: C), and JPMorgan Chase (NYSE: JPM) offer, can come with much higher costs and interest, depending on your credit quality. Counting on private loans can add years to your child's debt obligations, making it that much harder to get a fresh start after graduation.

Make the right moves
If you're fortunate enough to be able to put money aside for a college education for your kids, don't waste the opportunity. By being smart with your investments, you'll get the maximum payoff for your efforts.

Stay tuned each Wednesday this month as Dan goes through the ins and outs of saving and paying for college.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.