Key Takeaways
One of the biggest mistakes when saving for college is waiting too long to begin—starting early allows compound interest to work in your favor and can reduce reliance on loans later.
Using low-yield or poorly matched savings options can limit growth; choosing the right mix of college savings plans, high-yield savings accounts, or CDs can make a meaningful difference over time.
Failing to understand how different savings strategies impact taxes, financial aid eligibility, and access to funds may lead to missed opportunities or unnecessary penalties.
In the past, it was common to hear financial professionals refer to student loan debt as “good debt.” However, the average cost of a college education has nearly doubled this century. In 2024, tuition has a compound annual growth rate of 4.11%. Those owing more than 10% of their annual income in student loans tend to struggle financially.
In this economic climate, saving for college is a must. The ability to afford tuition can eliminate a lifetime burden and help ensure a stronger financial future. Unfortunately, many common mistakes prevent families from adequately supporting their child’s higher education.
With a proactive approach to saving money for college, nearly all the most common mistakes are avoidable. Below, we’ll discuss 7 mistakes to avoid while saving for college to prepare your child for a lifetime of success.
1. Not starting early enough
The ideal time to begin saving for your kids’ college education is before they are born. If you plan to have children, you can consider opening a 529 plan¹ as soon as possible.
Also known as Education Savings Plans, 529 plans are tax-advantaged savings accounts that work like a Roth IRA. Your after-tax contributions will likely be put into mutual funds.
Benefits typically include federal income tax-free withdrawals and may include state tax benefits, which vary by location. Most accounts have a nominal minimum requirement, often as low as $25 per contribution. There are no upper limits. The funds must be used toward qualified educational expenses, including tuition, room, and board.
Starting early ensures that your assets have ample time to grow tax-free. If you only start saving in your child’s teenage years, you may miss out on a decade or more of compound interest. It always costs more to borrow than to save, so start early.
2. Underestimating college costs
The question, “How much should I be saving for college?” has an imprecise answer that varies based on need.
As discussed, tuition in America is on the rise. Tuition fees at private colleges and universities have increased by about 40% since 2004. Ideally, financial experts advise parents to have a specific savings goal in mind. Even if you begin saving from birth, you may be aiming for a rapidly moving target.
Use a tool like our savings calculator to help visualize what that 4.11% annual growth rate will look like. Tools like the Federal Student Aid Estimator² can also provide a picture of the financial aid you might receive. Using a savings calculator can help you determine if you should also open a high-yield savings account or invest in CDs.
3. Relying solely on scholarships
It’s crucial to balance expectations with realistic planning. While 1 in 8 students will receive a scholarship each year, 97% of those students are awarded less than $2,500. Only 0.1% of those students receive a full-ride scholarship.³
Statistically, there are approximately 11,500 valedictorians in the United States in any given academic year. Likewise, only about 180,000 student-athletes receive scholarships to D-I and D-II schools.⁴ That accounts for 0.9% of all college students. It is much harder to stand out for merit or talent than many parents assume.
4. Ignoring tax-advantaged savings accounts
529 education savings plans are one example of a tax-advantaged savings account. They use after-tax money so that gains or income are typically not subjected to federal income tax or state income tax, depending on location. In other words, when it’s time to pay tuition, your child will have access to their entire savings.
Compare that to an account or investment with a tax-deferred status, such as a traditional IRA or 401(k). These use pre-tax income. Not only must taxes be paid at a later date, but you will be charged the rate at that time. These funds also could not be used to pay for your child’s education without paying a penalty for early access unless you were already aged 59 1/2 at the time of withdrawal.
Choosing a tax-advantaged college savings account for your child can help eliminate the tax burden.
5. Not regularly reviewing and updating your savings plan
If you do begin to save for college at or before your child’s birth, many things will change before they claim their diploma. You must account for changes in income, expenses, and rising college costs. This may require you to adjust your plan as your life circumstances or the economic climate shifts.
Review your savings plan periodically. Consider working with a financial advisor to make informed decisions about your accounts and investments. You may also want to consider regularly setting aside funds for expenses that are not qualified for 529 plan withdrawals using high-yield savings accounts or certificates of deposit. Using the Raisin savings platform, you can find, fund, and manage HYSAs and CDs from a network of banks and credit unions. With no fees and access to some of the top interest rates available nationwide, a single Raisin login can help you prepare for these costs.
6. Neglecting other financial priorities
Focusing on your child’s future is important, but don’t make the mistake of neglecting your own future. You still need to focus on accruing retirement funds, as retirement ultimately costs more than tuition. Likewise, emergency funds can keep you afloat in the event of a major, unanticipated expense.
You might consider opening a savings account with flexible, penalty-free withdrawals for education or emergencies. Furthermore, a balanced portfolio with a mix of volatile and conservative assets can ensure financial comfort as you age.
7. Not encouraging kids to contribute
Involving your children in the savings process can come with myriad long-term benefits. Encourage them to contribute to their own savings plan. Even earnings from a part-time job or babysitting gig can make a difference over time. The savings plans offered on the Raisin platform only require a $1 minimum deposit, making this strategy achievable. Once your child reaches adulthood, they can also utilize Raisin to take advantage of accounts with top interest rates of their own.
Studies suggest contributing to college savings can improve a student’s grades. Conscious stakeholders in their own education tend to work harder and take college more seriously.
Furthermore, contributing encourages students to think critically about the institution they choose to attend. They are more likely to understand the financial burden of higher tuition institutions. They might choose an in-state school offering a scholarship over a big-ticket “dream school.” This can save them tens of thousands of dollars over their lifetime.
Saving for college can seem like a daunting task. With savings accounts from partner institutions in Raisin’s marketplace, it can become easier than ever.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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