December is a busy time, but for families with college-bound students, it can be especially stressful. Conversations at holiday gatherings often revolve around college choices, student loans, or both. This article outlines the most common mistakes parents make when planning how to fund college—an important topic, given that for many families, this is the most significant financial decision they’ll face before retirement.

Whether your child is preparing to start college or is already enrolled, making informed financial decisions during these years is essential. Under current borrowing rules, parents often make major financial commitments on their own, without any third-party review or approval. Unlike a mortgage, where lenders evaluate your ability to repay, college financing places these decisions entirely on the family.

In this guide, we’ll help you build a strategic approach to college funding and highlight the most frequent pitfalls. You’ll find practical tips and expert insights to help you make smart financial choices and keep college costs manageable.

1.Depending on the Free Advice

A major limitation of the current process is the lack of financial transparency regarding the long-term outcomes and consequences of student debt. Many families take on student debt without a clear understanding of future monthly payments.

Colleges can only provide financial information for a single year. They lack the resources—and legal authority—to offer personalized guidance on increasingly complex issues such as taxes or 529 plans. Yet, most families rely solely on this limited advice when making critical college funding decisions.

Families need to recognize how costly and complicated these choices can be. Traditional college guidance focuses narrowly on the financial aid process, leaving students and parents with thousands of dollars in debt but little insight into repayment options or potential forgiveness. PayForEd fills this gap by delivering actionable insights that enable more informed decisions and better financial outcomes. This essential perspective is largely absent from the current system.

2. Not Completing the FAFSA

We believe every family should complete the FAFSA regardless of their financial strength. Completing the FAFSA will do a few things that many parents and students overlook. Many think this process is only for financial aid, but it is more.

Additional Benefits of Completing the FAFSA

• Helps with proper debt structure for both the students and parents
• Improves admission chances for High-Net-Worth families
• Enhances the family’s financial resource utilization
• Can help with College Waitlist selection
• Increases repayment and forgiveness options for students who will require post-graduate degrees.
• Helps students establish credit
• Provides a backup position if something changes in parents’ finances
• Reduces some of the financial exposure of the parents

3. Retirement Planning Contributions’ Impact on FAFSA

Another important factor with the FAFSA/IRS integration is how 1040 data is factored into the calculation. Prior to FAFSA Simplification, all deferred retirement contributions were added as income in the FAFSA calculation. Now, only Traditional IRA contributions will be included as income in the FAFSA calculation, and the family’s 401K, 403b, and 457 contributions will not be included since they do not appear on the 1040.

4. Student Loan Decisions and Structure

The biggest issue is the lack of planning regarding the student loan structure. Under the new OBBB rules, the traditional dependent undergraduate student can borrow only $27,000 in their name over the first four years. All other debt will require the parents or another person to be involved as a co-signer for private loans.

Many parents take Parent PLUS loans if there is a funding gap.  Starting on July 1, 2026, Parent PLUS loans will have annual and lifetime limits per child. These new limits are a significant change from the current rules, which are the cost of attendance minus other financial aid.  A common mistake many families may make is not understanding the new limits set by the One Big Beautiful Bill, which will take effect on July 1, 2026. 

The new Parent PLUS limits  set are a $20,000 annual cap and a $65,000 aggregate (lifetime) cap per student.  For families that have Parent PLUS loans disbursed before July 1,2026, the rules are different.  They can still borrow up to the student’s cost of attendance, less other financial aid, and can continue borrowing under current limits for up to three additional years or until the student finishes their program.

Another change is that parents will now be involved in most post-graduate programs.  The Grad PLUS loans are eliminated under the OBBB.  Depending on the program, post-graduate students will be limited to $20,500 or $50,000 per year, with lifetime limits also.  As a result, many students will need a co-signer for private loans to cover the remaining balance.

The challenge is that education costs are extremely high, and many families fail to explore borrowing options based on the projected debt. Choosing the right parent to assume the loans is also a crucial part of an effective plan.

 Individual Child vs Family Plan

Many parents’ college funding plans focus on one child rather than all their children. As I stated above, one parent will absorb much of the funding shortfall. If we are borrowing for the first child, what will be the debt incurred for the youngest?  This is especially important now that Parent PLUS loans have limits and families may need to use more private loans to pay for college.

As part of your plan, you need to review your family timeline. If you are borrowing for the oldest, how much will you need to borrow for the youngest, and how old will you be?

People over the age of 50 are the fastest-growing group of student loan borrowers. The growth is due to rising education costs and people having their children later in life. Making the right decision on which parent takes the loans and when to take them is critical to retirement planning.  The increased need for private loans will now have a formal underwriting process, unlike the current federal student loan process.  This makes debt planning more critical, since prior decisions affect younger children’s options because of the parents’ higher debt-to-income ratios.

Depending on Loan Forgiveness

We hear all these terms and programs to make college more affordable, but we delay investigating whether they apply to our situation. You must understand student loan forgiveness rules before taking on the debt.

Two major loan forgiveness programs are Public Service Loan Forgiveness (PSLF) and IDR/End-Of-Term Forgiveness. The borrower must use an Income-Driven Repayment (IDR) method in both cases.

The biggest surprise for many borrowers is that loan forgiveness is unavailable for most undergraduate-only degree borrowers unless they make less than 45K a year for the next 10 years.

Let’s understand the rules for the PSLF program. For the borrower to earn a credit month toward forgiveness, all of this must be present. You need 120 PSLF credit months.

• You need to be employed and paid by a government agency or a Non-profit (501c3)
• Considered a full-time employee (with some exceptions)
• Use one of the IDR methods
• Make 120 on-time payments

The math does not always work based on the calculation, and the limited amount of borrowing the students can have. You need to remember that the other Loans are Parent PLUS loans, which are legally the parents’ loans, not the students’.

End-of-term forgiveness does not follow all of those PSLF rules. Depending on the loan and repayment terms, the debt can take 20-30 years to pay off. This type of forgiveness is also taxable under current IRS rules, while PSLF is tax-free.

Administration and Rule Changes Uncertainty

• More straightforward calculations
• No negative amortization
• Possible principal reduction
• Lower tax implications for forgiven amounts

When reviewing your student loan repayment plan, borrowers’ AGI may differ, and the new calculation may be higher than expected.  This is another reason to consider proper planning and tax review.

Understand the College Return on Investment

Understanding college returns is both an emotional and expensive decision. The national average graduation rate after four years is approximately 42%. The best way to save money is to graduate on time.

The cost of not graduating on time is more than the added tuition and associated costs. You need to factor in the opportunity cost of not being employed and of not earning income, which is often understated.

More careers require postgraduate degrees. The sooner a student decides on a career path, the sooner their college funding plan can be reviewed and adjusted if needed. The bad news is that once students complete their first bachelor’s degree, parents are now part of the graduate school financing process due to the new private underwriting process.

Common Mistakes Parents Make In Their College Funding Plan Conclusion

Now that loan repayment has resumed, more parents are facing challenges with Parent PLUS loans. Many relied on “free advice” and ended up stuck with costly mistakes. Our goal is to help you avoid that trap.  What many student and parent borrowers do not understand is the loan servicers are limited to the advice they can give.  It is free advice, and you get what you pay for.

In today’s complex college funding landscape, most families will need to borrow—but how you borrow matters. You need a trusted resource that can help you minimize costs, maximize value, and structure loans for the best repayment and forgiveness options. That’s where PayForED comes in. Our network of college finance professionals provides the expertise to help you make more informed, strategic decisions, saving you time, money, and stress. Don’t leave your family’s financial future to chance—get the guidance that pays off.