5 college savings myths parents should reject

Originally published September 23, 2022 on Argus Leader; edited from the original.

Every year around August or September, the back-to-school scramble kicks into full gear. Parents flock in droves to shopping centers with their children in tow, loading up their carts with colorful folders, notebooks, and pens. Soon, parents can take a breather as the school bus trundles away.

However, even as one preparation period closes for parents, another — the pre-college scramble — may still be counting down.

“When you’re sending your kids off to elementary school, you can leave your prep to the very last minute,” Josh Haeder, South Dakota’s state treasurer, shared in an interview. “Sure, it might be stressful to go school shopping the day before the fall semester starts, but you’re not going to worry that your student won’t be able to attend second grade if they don’t have a notebook in their favorite color.”

“College is different. If you don’t start saving for your child’s higher education until the eleventh hour, sending them off to college will be harder,” he said.

According to a survey by the Carnegie Corporation of New York and Gallup, over half (54%) of parents say they would want their child to pursue a bachelor’s degree after high school, if possible. An additional quarter (24%) would like to see their children enroll in two-year associate or non-college training programs. While the costs of college can sometimes seem daunting, parents of college-bound students have more financial tools at hand than they may think.

Since 2001, South Dakota has offered a 529 savings plan: state-sponsored investment accounts help families grow their college savings over time and provide tax benefits when used to pay for qualified educational expenses.

“Many families don’t realize how useful a 529 plan can be during the college savings process or feel overwhelmed by the prospect of getting one,” Haeder said. “But taking full advantage of a college savings plan doesn’t need to be stressful or hard.”

With that opportunity in mind, let’s debunk a few of the most common misconceptions around 529 plans — and college savings overall.

Myth #1: Educational debt is inevitable

While college is expensive, the cost isn’t insurmountable. A smart savings plan can make a major difference in the future outlook of your future graduate, so when it comes to saving for college, earlier is always better. After all, higher education prices are lofty; according to research from CollegeData, the cost of attending a four-year college ranges from $27,330 per year (for in-state public schools) to $54,800 per year (for private schools). Given the sheer costs involved, it’s not surprising that 70% of students who pursue a bachelor’s degree graduate with education debt.

“Debt can be a major hindrance to graduates, especially as they start families of their own,” Haeder noted. “Anything a parent can do to reduce that burden will be invaluable to the student.”

Myth #2: It’s possible to be “too late” to save.

While it’s generally good practice to start saving when your child is young, it’s never too late to start putting money aside. Parents can open a 529 plan and take advantage of the savings and tax benefits it provides, regardless of how old their children happen to be. As Haeder puts the matter, “Any amount a parent can save ahead of time is money that doesn’t need to be borrowed for a child’s secondary education.”

But, is there an ideal time to start contributing to a college savings plan? According to a Sallie Mae study, most parents begin to save when their child is around seven years old.

“It’s never too late to start saving; however, you should start saving early to take full advantage of compounding,” Header said.

Myth #3: You can lose your savings if your student receives a scholarship.

Families should not worry that they’ll lose their hard-earned savings if their child receives a scholarship.

“Your savings are yours, period,” Haeder said. “A 529 plan offers tax-free earning potential and withdrawals as long as the money is used to pay for qualified education expenses. I would always encourage families to look at scholarships, as they are an excellent way to further reduce the cost of secondary education.”

That said, Haeder notes that it is essential to distinguish between savings, scholarships, and financial aid.

“‘Financial aid’ generally refers to money that needs to be paid back plus interest after college,” he explained. “This is the debt that so many young people are currently bogged down with. A 529 plan can help offset this cost — and if you plan to use financial aid at some point, a 529 plan can help reduce the amount needed to complete secondary education.”

That said, Haeder notes that it is essential to distinguish between savings, scholarships, and financial aid.

“‘Financial aid’ generally refers to money that needs to be paid back plus interest after college,” he explained. “This is the debt that so many young people are currently bogged down with. A 529 plan can help offset this cost — and if you plan to use financial aid at some point, a 529 plan can help reduce the amount needed to complete secondary education.”

Myth #4: Only a parent can contribute to a 529 plan.

Parents aren’t the only people who can help grow a child’s college savings. 529 plans accept third-party contributions, regardless of who owns the account — which means that grandparents, aunts, uncles and even friends can contribute!

“Grandparents and other relatives, instead of a video game or toy, how about putting that money into a 529 plan?” Haeder suggested. “Games and toys have a shelf life; helping your loved one pay for college means they won’t have massive student debt for 10 or more years after graduation.”

Myth #5: 529 money can only be used to pay for four-year college programs.

Four-year degree programs are popular — but they’re not the only option for those who want to avail themselves of higher education. 529 plans are designed to provide savings support, regardless of whether a student enrolls in a degree program, technical school, or certification program.

“South Dakota doesn’t want to limit its learners; our state has great technical education schools, for example,” Haeder said. “Plus, 529 plan dollars never expire, so if a child needs some time to explore their best path forward, these plans allow for that flexibility.”

Every person’s route into higher education is a little different — but all require funding support. Don’t put off your child’s college preparations; start saving today to give your child a shot at a brighter tomorrow!