Financial aid guide for students and parents

From the day a child is born, there are many dreams and expectations that parents attach to the child. One of these dreams is to see their child well educated and well established in their careers. In the present modern times, parents start planning their child’s careers too but make mistakes in financial planning for the same. The mistakes of their financial planning for child’s education are realized only at the start of college and there is very little time to recover.

A few common mistakes made by modern-day parents include–

• Postponing saving for college – Many times, parents start thinking about saving for college education only when the child reaches high school. In these cases, investments do not get sufficient time to grow and it is too late to modify investments or investment pattern.

• Using retirement saving to pay for child’s education – Using funds from retirement plans like 401(K) to avoid student loans is a massive mistake as it depletes the funds for their retirement. They do not have enough time to refurbish those funds before the retirement kicks in, leading to a financial turmoil in their golden years. Another grave mistake is some parents stop saving for their retirement during the child’s college years to pay for his education.

• Being unrealistic about one’s financial situation and college costs – It is important to be realistic about how much will one be able to earn and actually save over the years. Discuss your child’s expectations from a college, his goals and interests and modify the savings accordingly.

• Not keeping any room for extras – Sometimes people maintain such a strict financial plan that there is no buffer or room for any extra expense. There are some miscellaneous and sometimes unexpected expenses involved like plane tickets, accommodation charges which are not considered.

• Ignoring the impact of time horizon – The time horizon available for saving for child’s college education is quite less compared to time available for retirement planning. Thus, college savings do not have a large time period to grow even if a person starts saving from the child’s birth. Thus, pattern for college savings should involve less risky investments vehicles as there is not much time to ride out of a brief hiccup in the investment markets.

• Understating the spiraling college costs – Trends show that there has been a continuous rise in tuition inflation which has also led to increase in the cost of college education. Many people underestimate the effects of inflation and hence even if the person saves in accordance with college costs today, due to inflation, they may not be sufficient when his child starts attending college.

• Not making use of tax benefits available for education – People fail to take advantage of tax benefits in the form of tax breaks and tax credits that are available for education. It can help parents save thousands of dollars but many parents are either unaware or do not find these significant enough.

From the time of child’s birth, time for attending college is only few years away and little preplanning and foresight will help in avoiding these mistakes. Ensuring that you are on the right track and modifying them as required, is a smart and rewarding move.