Picking the wrong investment options

529 plans offer different investment options based on risk tolerance and time horizon until college. Families with young children should generally select more aggressive investment options since they have more time to grow their savings and recover from potential losses. As the child gets closer to college, allocations should be shifted toward less risky conservative investment options.

Choosing the wrong 529 plan account owner

529 plans owned by a parent or dependent student receive favorable treatment on the Free Application for Federal Student Aid (FAFSA). But, 529 plans owned by anyone else, including a grandparent, could affect a student’s eligibility for need-based federal financial aid.

Assets held in a grandparent-owned 529 plan account are not counted on the FAFSA, but distributions used to pay for a grandchild’s college education will reduce financial aid eligibility by as much as 50% of the amount of the distribution. Grandparents should wait until after January 1 of the student’s sophomore year of college to take a 529 plan distribution, or consider other workarounds to minimize the negative financial aid impact.

Saving too little

A college savings calculator can help parents determine if they are on track to save enough for a particular college or type of college. A realistic goal for most families is to aim to save one-third of college costs and cover remaining two-thirds can be covered by current income and student loans.

Not automating contributions

Most 529 plans allow families to schedule automatic contributions from a linked bank account or payroll deduction. With automatic investing, parents can take advantage of dollar-cost averaging and minimize volatility in their 529 plan. This “set it and forget it” method is a proven strategy to help parents save more for college.

Waiting to start saving

Each day parents wait to start saving in a 529 plan they miss out on potential tax-free earnings growth. For example, if a family starts saving when their child is born, about a third of their college savings goal will come from earnings. But, parents who start saving when their child is in high school will have to save six times more per month to reach the same college savings goal.

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Saving For College is an unbiased, independent resource for parents and financial professionals, providing them with information and tools to understand the benefits of 529 college savings plans and how to meet the challenge of increasing college costs.