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Saving for College vs. Retirement: A Difficult Balance

Many responsible adults are saving for a dream: financial freedom. While financial freedom is something incremental rather than a destination or arrival point, it’s certainly a worthy aspiration and a reason to keep saving. Spending the rest of your life without having to work for pay (also commonly known as “retirement”) is something to look forward to. Then there’s a huge speed bump: the children’s college. What do you do about that? 

Prioritizing Retirement Savings over College Savings

Your children’s college plans shouldn’t usurp your retirement. Maybe you’ll retire in 30 years and your first child will be ready for college in 17 years. Still, saving for retirement is a higher priority. There are multiple ways to finance college—such as scholarships, grants, loans, and campus jobs—but there’s only one way to pay for retirement: saving.

The best gift you can give your children is not burdening them by having them support you in your retirement. If you don’t save enough, they’re stuck. This can become a big issue if you have long-term care needs down the road, because assisted living and nursing care are crazy expensive. If you haven’t put money away, likely your kids will have to cover those costs. In many ways, that’s why funding your own retirement is an even greater gift to your children than paying for their college education.

Here’s a tip: Today, when a school uses financial aid formulas to calculate how much you’re expected to contribute for your child’s college education, any assets in retirement plans are not counted. Those assets include IRAs, Roth IRAs, 401(k)s and so on. Since money in retirement plans is not part of the equation when colleges evaluate what you’re able to pay toward tuition, the more savings you shelter there, the more financial aid junior’s likely to get. Interestingly, the list currently includes Roth IRAs, where you could potentially withdraw the principal penalty-free to pay for college if you choose.

Borrowing with Care

In the long run, getting your kids to the point where they’re earning a good living will decrease your expenses substantially because you’re no longer supporting them! However, you need to be smart about taking on college debt.

It’s common to do at least some borrowing, but let’s look at a few caveats:
  • Whose name should the debt be in? A lot of well-intentioned parents don’t want to borrow in their child’s name, but usually you’re much better off that way. Educational loan programs for students generally carry lower interest rates than educational loan programs directed toward parents. If you want to be supportive, you can always choose to help your child pay off debt later.
  • How much debt is involved? Helping your child get an education that hopefully results in a better-paying job and increases your long-term financial freedom is only beneficial if you avoid getting strapped with too much debt. Debt is anti-freedom.
  • Will the career and college choice make the debt worth it? College is an investment, but don’t over-use debt to finance an education that results in a low-paying career. For example, borrowing $250,000 should result in the type of job that pays enough to support that level of debt. There are a number of factors to consider, such as school choice and financial aid. The more debt, the longer it will take you—and/or your child—to pay it off.

Finding the Right Balance

Financial aid season has opened: Plan, learn, know what you can afford,” an article I co-authored with Bill McMurray, talks about keeping college costs in perspective. Placing college in the context of your financial plan and balancing affordability with the right academic and social fit can help prevent college from derailing your finances.

Finding the right balance is the whole focus of College Liftoff, our program for parents of college-bound teens. Program participants receive realistic, concrete instruction from seasoned experts in both the college- and financial-planning fields.

Multi-generational financial freedom is important. You’ve recognized the value of investing in education, and that should be applauded. At the very least, planning for your children’s college will help you to get them out of the nest so you can build financial freedom faster!