5 Common College Planning Mistakes

When paying for college, parents often make common mistakes that end up costing them financially. Listed below are five tips parents should read to avoid making these common mistakes.

1. Assuming 529 Plan distributions are always tax free

529 plan earnings withdrawals may be taxable. Distributions of earnings from the 529 plan will be subject to income tax if the amount withdrawn from the 529 plan exceeds the qualified education expenses. Therefore, it is very important to be sure the amount withdrawn from the 529 plan does not exceed the qualified education expenses if you do not wish to pay tax on the earnings. Keep in mind that any expenses used in determining the Lifetime Learning or Hope credit will reduce the total qualified expenses used in calculating the tax exclusion for distributions from a 529 plan. For example, if you claim the Lifetime Learning credit based on qualified expenses of $10,000, the qualified expense is reduced by $10,000.

2. Assuming private schools always cost more than public schools

A student who attends an expensive private school may qualify for more financial aid than a student attending a lower-cost public school. The difference in the true cost may actually be less than you might expect because the student may receive gift aid from the private school.

3. Not reading the Award Letter carefully

Often times the colleges are awarding you debt! There are two types of financial aid: gift-aid and self-help aid. Gift aid includes grants based on your financial need, and scholarships usually based on academic performance. Self-help aid includes loans, which must be repaid, and government work-study programs. Most of the financial award at public institutions is self-help aid, however most financial aid at private schools is gift aid.

4. Not filling out the FAFSA because you think your income is too high to qualify for financial aid

Even if you do not qualify based on financial need, many schools will not consider you for non-need based aid if you do not apply for need-based aid. So regardless of what you think your eligibility status might be, it is important to fill out the FAFSA (Free Application for Student Aid). Federal student loan applications (Unsubsidized Stafford and Plus) also require the completion of the FAFSA. It is important to check with each school for its requirements.

5. Borrowing too much from Life Insurance to pay for college

Some parents use life insurance loans as a source of college funding. You should beware of taking out a life insurance loan. What typically happens when you take out a life insurance loan for a long period of time is that the loan balance increases because you do not pay the interest. Therefore, as the loan value increases, your family gets very little, if any death benefit. Also, the loan balance can eat up all the cash value, and there is not cash value left in the policy to sustain it. The policy will terminate unless you can pay back the loan. 


- By: Karen Bolton