6 Reasons Parents Shouldn’t Invest in a College Savings Account

Even good intentions can have negative consequences.

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When I was a financial advisor, the main goal for many parents was to pay for their children’s education. This means investing in accounts like 529 Plans or Coverdell Education Savings Accounts.

Though our hearts may be in the right place—and we hear from the “experts” we need to contribute to these accounts—many times it doesn’t make financial sense. I understand we want to give our children the best, but we need to get to our own finances in order first.

Remember, there are many options to pay for college—loans, scholarships, internships, etc. When it comes to retirement, we don’t have those options. The only option we have is to make good financial decisions and save money.

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Here are six reasons you shouldn’t invest in a college savings account for your children.

1. You have credit card debt

If you have any credit card or unsecured debt, you shouldn’t be investing in college savings account. This includes credit cards, signature lines of credit, store credit, or personal loans.

Unsecured debt is difficult to eliminate due to the compounding interest. Instead of worrying about college, use that money to pay down your credit cards. This will help your debt elimination go much faster.

Additionally, you will become a much better parent after eliminating debt because a huge stress will be lifted off of your shoulders. Being a better, and present parent is much more beneficial than paying for their college.

2. You aren’t maxing out your 401(k) match

Millions of Americans work for companies that offer a 401(k) plan with a match. An example of a 401(k) plan with a match, is a company will match your contributions 50 cents on the dollar up to 5% of your income (Sometimes the match is much better. I worked at a company that gave me $1.25 for every one dollar I contributed up to 6% of my pay).

When your company offers a match, the best decision you can make is maxing out your match. This is like signing up for free money, and you will never get a return like that in the stock market.

Before investing in any college savings accounts, you need to take advantage of the match. You will thank yourself as you near retirement and your account value has sky rocketed.

3. You aren’t taking advantage of a Roth IRA

Other than a 401(k) plan with a match, a Roth IRA is the best investment vehicle available. The reason this is such a powerful tool is because all of your earnings come out tax-free.

Let’s assume you invest a total of $10,000 inside of this account, and it grows to $25,000 over 20 years. All of the money is tax-free when you withdraw it from the account. That’s huge!

If you don’t have a 401(k) plan that matches your contributions, this is the best place to start saving for retirement. If you max out your 401(k), then contribute to a Roth. After contributing to both is when you should consider college savings accounts.

4. You can better returns somewhere else

When you are investing in these accounts, the money is typically invested in the stock market. If you are an expert at flipping Real Estate, or own your own business, you may be able to get better returns.

Personally, I have a side business where I sell things on Amazon through a program called Fulfillment by Amazon (FBA). Often I can get returns of 100% or more. It makes more sense for me to invest money in this business instead of a college savings account. The returns are better and more consistent.

5. Your children have less than five years until they start college

The stock market is risky, and if your children have less than five years until they start college, that money shouldn’t be in the stock market.

Do you remember 2008? In a span of 17 months, from October 2007 to March 2009, the DJIA dropped 54%. If you had children approaching college—and had saved $25,000—at the end of those 17 months, you would have less than $12,500.

When you are investing in these plans, you need two things: time and proper asset allocation. This means you need at least five years until they start college, and the investments need to include stocks, bonds, gold, commodities, and even real estate (this can all be achieved through most index funds).

6. You want to use that money for something greater than college

Believe it or not, college isn’t a determining factor for success. Maybe you don’t want your child to go to college because you want them to experience more.

We’ll assume you can save $1,000 a year (pat yourself on the back if you can do this) for your child for 18 years. Assuming a 7% rate of return, that account will have approximately $36,000 when your child starts college. You’ve done a GREAT job, but that may only get them one year of college in 18 years.

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Instead, you may want to use that money for a number of things that will help your child succeed in life.

• They could use that money to start a business.
• Take online classes,
• Flip a house,
• Buy a franchise,
• Other things that will give more real world experience.

In the end, it is your decision whether or not you will save for your children’s education. There isn’t a right or wrong answer; it just depends on your beliefs and situation. The most important thing is just to make sure you love them.

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Flickr/ Rafael J M Souza

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