Last year's college graduates racked up more debt than any other previous graduating class. Given the high cost of college these days, it's no wonder the average 2015 graduate owed more than $35,000 in student loans. But while rising tuition expenses are partially to blame for the county's ongoing student debt crisis, a big reason why so many college hopefuls are resorting to debt has to do with the fact that their parents simply aren't saving as much. In 2015, only 48% of parents with children under the age of 18 were actively saving for college, and those who did save only managed to amass about $10,000 -- a respectable sum, but not nearly enough to make a significant dent in the overall cost of college today.
Consider the average estimated cost of tuition for the 2015-2016 school year: $9,410 for a public four-year in-state college, $23,893 for a public four-year out-of-state school, and $32,405 for a private nonprofit four-year college. Of course, these figures don't even include room and board, an added expense that many students can't avoid.
No matter your personal financial situation, saving for college can be a tricky prospect. If you're serious about helping your kids fund their education, here are three major mistakes to avoid.
1. Starting too late
Unlike retirement, which many people have a good four decades to save for, most folks only have a maximum of 18 years to build their college savings. For this reason, it's imperative that you start as early as possible -- ideally, as soon as your first child is born. Say you start contributing $200 a month to your child's college account at birth, and continue to do so for 18 years. If your investments earn you 6%, which is actually a relatively conservative number given the stock market's average performance, by the time your child enters as a freshman, you'll have over $74,000 stashed away. On the other hand, if you wait until your child is 10 to start saving that $200 a month, you'll have just $24,000 to work with.
2. Overfunding your 529
A 529 plan can be a useful tool in helping you reach your college savings goals, as it allows your money to grow tax-free. But there's a catch: You must use that money for qualified higher education purposes only. Withdraw that money for non-college expenses, and you'll pay a 10% penalty on your investment gains. Now while some might argue that having too much money in a 529 isn't such a terrible problem to have, remember that there are some costs associated with college that 529s don't cover. Travel to and from school, for example, can get expensive if your child is studying across the country, and unfortunately, you can't use a 529 to pay for it. Before you put all your college savings in a 529, study up on what your plan does and does not consider a qualified expense, and consider opening a separate account to save for incidentals not covered by your 529.
3. Falling back on your retirement accounts
In the absence of dedicated college savings, some people figure they can dip into their retirement funds to foot those hefty tuition bills. In fact, in 2014, 7% of families took funds out of a retirement account to pay for college. But while you may be tempted to use your 401(k) or IRA to pay for college, doing so could prevent you from meeting your retirement savings goals. The more money you withdraw from your retirement account, the less you'll have down the line, when you're no longer working and need it the most. Remember, too, that when you withdraw money to pay for college, you're not only losing out on that principal amount in retirement, but also on the interest or earnings that principal could've brought in. Furthermore, if you take money out of a 401(k) to pay for college before you reach age 59-1/2, you'll be hit with a 10% early withdrawal penalty plus be subject to taxes on your withdrawal amount.
Now if you use your IRA to pay for college before turning 59-1/2, you won't be hit with that same 10% penalty, but you'll still pay taxes on your withdrawal. In the case of a traditional IRA, you'll be taxed on the total amount you take out. If you have a Roth IRA, you'll only be taxed on your investment gains, not your original principal. That's because the money you put into a Roth IRA is taxed up front. But regardless of the type of account you have, your best bet is to leave that money where it is for retirement, as you initially intended, and cut back on other living expenses to save for college.
Finally, if you don't manage to reach your savings goal by the time your children enter college, remember that there are alternatives to taking on loads of debt. You could encourage your kids to work during their studies, or defer enrollment for a year or two, work full-time, and use those earnings to pay for school. Saving for college is indeed a noble goal, but as a parent, it doesn't all have to fall on you.