With college prices continuing to soar, ithas never been more important forphysician-investors to save funds fortheir children's future. The following are10 mistakes that every physician-parent with a college boundchild should avoid:
1. Not using money earmarked for college educationexpenses. Custodial accounts will often transferaccount ownership to the beneficiary at a certain age.This could spell trouble if your child realizes they couldspend this money. Use accounts where you control themoney. The 529 savings plan, for example, even allowsyou to change the beneficiary.
2. Waiting too long to start saving. Time is an importantfactor when saving for college. Starting whenyour kids are young lets you maximize the power ofcompounding and reduce the amount you have to save.
3. Letting the cost of a college education intimidateyou. According to the College Board, the 2003 to2004 average annual cost of a 4-year public institution is$4694. Helping your child choose the right type ofschool to fit their personality and educational needs isimportant when determining educational expenses.
4. Not knowing the real costs of a college education.Tuition is not the only cost associated with a college.Other costs could include room and board, books,supplies, food, personal expenses, fraternity/sororityfees, etc. Be flexible and expect the unexpected.
5. Using the wrong investment allocation. The properallocation is often dictated by the amount oftime left before your child enters college and the amountof college education. A diversified portfolio consisting ofoffensive and defensive securities makes it easier to meetthe rising costs of college.
6. Not learning about the different types of financialaid. Whether aid is in the form of grants, loans, orscholarships, educate yourself on the rules, regulations,terms, and conditions associated with each type. You willprobably be surprised as to what is available.
7. Ruling out different savings plans. Finding andselecting the best savings plan for your situation isa difficult decision. There are numerous methods consistingof a personal savings account, Uniform Gift toMinors Act account, 529 savings or prepaid tuition plan,education savings account, withdrawals from traditionalor Roth IRAs, etc. Each plan has different characteristicsthat could either be an advantage or a liability.
8. Not working because it might interfere with academicsuccess. Ruling it out as a solution to financialproblems can have devastating consequences in andout of the classroom. I recommend campus employment,if possible, as a way to pay for school, gain experience,and teach responsibility. Some studies suggest that manystudents improve their educational performance using acombination of a moderate workload and full-time studies.Ask your child what they are comfortable with.
9. Not adjusting a personal tax return for educationaltax credits. The Hope and Lifetime Learning taxcredits allow a dollar-for-dollar subtraction from thetotal federal income tax bill in the amount of a credit.The Hope credit applies to tuition and fees for thefirst 2 years of post-secondary education. The LifetimeLearning credit is available for tuition and fees for allyears of post-secondary education as well as fees forcourses to improve or acquire job skills. Be aware thatcertain rules and restrictions apply for eligibility.
10. Substituting college planning for retirement planning.Contributions to tax-deferred accounts aretoo good to suspend because you feel the need to save foryour child. We all want to help our children out as muchas possible, but in this case it is good to be selfish. Letyour children know there are other methods for fundingtheir college education and let them accept part of thefinancial burden. Visit www.collegeboard.com for additionalinformation on college planning.
William B. Howard, Jr, is president of WilliamHoward & Co Financial Advisors, Inc, a fee-onlyinvestment and financial planning firm in Memphis,Tenn. He has 23 years of experience workingwith physicians and was named one of the top 150advisors. He welcomes questions or comments at901-761-5068 or firstname.lastname@example.org.