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4 College Savings Mistakes Even Savvy Parents Make

04/02/2015 05:29 pm ET | Updated Jun 02, 2015

Arlene George assumed that her child's college education would come with a hefty price tag, so she started saving when her daughter, Aimee, was three months old.

Depending on what she could afford, George socked away between $50 to $200 a month, figuring that the funds would be enough to cover at least the first three years of school.

"I based this on the fact that I put myself through Drexel University for a total of $40,000," says George, 48, an accountant in Levittown, Penn. "But I could not have been more wrong."

Aimee, now 18, enrolled at Johnson & Wales University in Rhode Island in September. With room and board, the school costs over $40,000 a year.

"Our 529 will cover this year and a little bit of the first semester of sophomore year, after scholarships," George says. "She and I will both be taking out loans for her last three years of college."

George isn't the only parent left feeling like her diligent savings efforts fell short: Three out of four families worry that they won't have enough to pay for college.

But there's also some good news: For the first time since the recession, Americans are ramping up their college savings. According to Sallie Mae's How America Saves for College 2014 report, more than half of all parents have started saving for higher education.

And college-savings account values are also on the rise: The average amount families have in tuition funds is now valued at over $15,000 -- that's a 30 percent increase from 2013.

The challenge, however, is that those savings still pale in comparison to eye-popping tuition rates, which are rising faster than inflation. For the 2014-2015 school year, a public, in-state, four-year school costs $18,943.

To help parents better combat the college cost creep, we pinpointed the most common mistakes parents tend to make when saving for college--and then tapped financial pros and college planning experts to school us on how to avoid them.

College Savings Mistake #1: You Haven't Set a Goal
According to Sallie Mae, a whopping nine in 10 parents today believe that a college education is a strong investment in their child's future.

Yet few parents have actually taken the time to calculate just how much is needed to cover that education: Among those who are putting money away for college, just 45 percent have a set goal for their savings.

"Saving without a specific number [in mind] is like leaving the house on a road trip with no map," explains Hilary Hendershott, a CFP® based in San Jose, Calif. "It's tough to be successful if you don't measure and track your progress toward a goal."

But here's some incentive: The Sallie Mae study revealed that parents armed with a specific plan felt significantly more confident about their savings, and had successfully socked away 83% more money than non-planners.

How to Avoid Making This Mistake: Run the numbers by using a college calculator like this one from the College Board to hash out the estimated cost for your child's education. The calculator can also clue you in to whether you're on track, based on your current savings level, as well as pinpoint how much more per month you'd need to sock away to catch up.

Sure, it might be painful to look at the bottom line and realize how far you have to go--but the sooner you start, the easier it will be to amass a healthy pile of cash by the time that first semester rolls around.

"Remember, your greatest asset is time," says Mark Kantrowitz, a college planning expert and senior vice president of Edvisors.com.

If you're having trouble staying motivated, consider this: A parent who squirrels away $300 a month for 10 years at a 7 percent rate of return will end up with a college cache of $52,228.

But if that parent resorted to borrowing the same amount at the current Stafford Loan rate of 6.8 percent, he'd owe $601 a month for the next 10 years -- and end up shelling out nearly $20,000 in interest.

Bottom line? "Every dollar borrowed will cost you about $2 by the time the debt is repaid," Kantrowitz explains. "So even if you start late, you will save money."

College Savings Mistake #2: You're Not Making Your Money Work Hard Enough
Shockingly, only about one third of parents socking away for higher ed are doing so in an education-specific savings vehicle, such as a 529 plan or Coverdell Education Savings Accounts (ESAs), according to Sallie Mae.

In fact, most moms and dads are settling for general savings accounts. But why?

"They're putting their money where they can get to it," explains Sarah Ducich, senior vice president of public policy at Sallie Mae and the report's coauthor, noting that parents are likely still shell-shocked from the recession. "It's sitting in their savings, so if they lose their job, they can more easily get to it."

But college funds sitting in a run-of-the-mill savings account may actually lose money over time, thanks to low interest rates that can't keep up with inflation. "In a savings account, you're costing yourself thousands of dollars of potential investment returns," explains Hendershott.

Money in a 529 plan, however, can be invested -- and the earnings grow tax-free, as long as the funds are used for qualified college expenses.

How to Avoid Making This Mistake: Research what tax benefits are available if you contribute to a state-sponsored plan -- 34 U.S. states currently offer some type of tax deduction. You can view a full list of benefits at finaid.org.

Since you can invest in any state's 529 plan -- not just your own -- it's a good idea to shop around. You'll also have the choice of opting for a plan sold directly by the state or through an investment adviser -- although experts generally recommend avoiding adviser-sold plans, since they tend to carry higher fees.

You can compare each plan's full investment options, fees and various tax benefits at sites like savingforcollege.com.

College Savings Mistake #3: Your Retirement Account Is Moonlighting as a Tuition Fund
Sending Junior to Stanford shouldn't have to mean sacrificing your golden years.

Yet some 18% of parents in the Sallie Mae report admit to earmarking at least part of their retirement account for higher education. Even worse, a full 30 percent plan to primarily use those funds for their children's college costs.

It's a major mistake for a number of reasons, Hendershott says. For one, college bills usually hit before you retire, and most parents don't have a specific plan for how much of their 401(k) they intend to use for college costs. "If you don't have a number in mind, you're likely to just pull it all out," she explains.

Second, while IRA funds used for qualified education expenses are often exempt from early withdrawal penalties, that is not the case for traditional 401(k)s, which carry a 10 percent premature distribution penalty -- on top of any income taxes you'll owe on the money.

Not to mention that you might actually be hurting your student's shot at getting more aid by tapping your retirement accounts. On financial aid forms, withdrawals from retirement plans are generally counted as income, Kantrowitz explains.

But, most important, using your 401(k) to squirrel away for college means you're not truly maxing out your retirement savings for what it's intended for--your golden years. And since just 18 percent of people feel confident they'll have enough money to live on in retirement, "it puts you in a bad situation later of probably having to rely on your kids for your own financial support," Hendershott explains.

How to Avoid Making This Mistake: Aim to save for both -- but prioritize your retirement.

In fact, paying down credit card debt, building up an emergency fund and getting on track for retirement should all take precedence over college savings.

At a minimum, you should be setting aside 10 percent to 15 percent of your annual income toward retirement, Hendershott says. Then send whatever's left toward other goals, like education. "You want to almost fully fund your retirement savings before you start saving for college," she says.

As any savvy financial planner will tell you: You can take out loans for college, but there's no such thing as borrowing for retirement.

College Savings Mistake #4: You Send a 'Pick a School, Any School' Message
When it comes to the college conversation, only 8 percent of families in the Sallie Mae study acknowledged that they "limit college choices based on cost."

Translation: Even if families can't afford every school in the country, they're indicating to their children that all institutions are on the table.

"Parents oftentimes consider money to be private information and don't want to talk about finances at all," Kantrowitz explains. "So it's very hard for parents to say no to children -- even if it means being in debt up to their eyebrows."

How to Avoid Making This Mistake: Let your college-bound teen become part of the discussion and get a taste of financial reality. "This is a great opportunity to teach a child about financial planning," Kantrowitz says.

So sit down and crunch the numbers together, showing your kid how much you've saved, how much spending money he can reasonably expect while in college, and how much is reasonable for you -- and him -- to borrow.

"Tell your child, 'You don't have a full trust fund when it comes to college, so we'll need to look at scholarships,' " Hendershott says. And keep it positive by touting the skill sets he can play up on scholarship applications, noting that smaller schools might reward his talents with grants or awards.

Perhaps most important is to drill down to the bottom line: You can afford a college that costs no more than X amount per year. "Often, children will step up to the plate and say, 'O.K., I understand,' " Kantrowitz says. "It's simply about showing them what you can and can't afford."

This post originally appeared on LearnVest.

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LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the individuals interviewed or quoted in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other's products, services or policies.

This blog post is part of the 'College 101' blog series, curated by the editors of HuffPost Financial Education to provide parents with the best advice for financing their children's college educations. To see all the other posts in the series, click here.

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