Should you focus your financial plans on funding your children’s college education out-of-pocket or through parent loans? This is a question on the minds of many parents that I speak with on a regular basis (and also a question that I personally have to deal with having a third grader and a kindergartener growing up too fast). The retirement vs. education question gets even more challenging when children reach high school and the time horizon to save gets shorter.
Most financial planners agree that you should have a solid financial foundation in place before paying for college or adding additional debt to the personal balance sheet. This basic foundation includes a fully-funded emergency savings fund, minimal high interest consumer debt, and a “healthy” retirement savings plan (i.e. on track to replace at least 80% of pre-retirement income or your own goal). Saving for retirement should always come first (unless you are prepared to deal with the consequences).
Some of the consequences of sacrificing retirement savings to fund college include delaying retirement (or not being able to retire on your terms), downsizing retirement income plans, selling investment property, and the biggest potential consequence – financial stress and frustration. A recent couple that I met with during a coaching session were faced with all of the above consequences as their son finished college after 6 years and had recently moved back home after being unable to find stable employment. Yes, he was helping pay some of the utilities to cover “rent,” but they were now paying loans taken out on his behalf and really second-guessing their decision to put college in front of retirement on the priority list.
Do I want my children to have amazing career opportunities and to learn and grow when they eventually graduate high school? Of course! Do I want them to be faced with the burden of paying for college own their own? Like most parents, my answer to that question is usually a resounding no, but it’s never a simple yes or no decision in many areas of our financial lives.
In the case of deciding how to help fund our children’s future college education expenses, the best solutions depend on the progress that we are making in other areas of the financial planning process. Many parents that I work with are surprised to find out that my response to their education planning questions such as “what are the best savings vehicles for college” and “how can I access my retirement accounts to pay for college” are met with questions they need to ponder first prior to seeking the best solutions. These important questions to explore prior to continuing to examine college funding alternatives include the following:
- Do we have a budget or personal spending plan currently in place?
- Is our emergency savings fund fully funded with at least 3 to 6 months worth of living expenses?
- Have you paid off all high interest consumer debt such as credit cards or high interest loans?
- Have you eliminated your own student loan debt?
- Am I on track to meet my retirement income goals?
If you answered yes to all of the above items on the checklist then you are in a good position to start saving for retirement. The 5 Steps to Education Planning guide provides a step-by-step outline of what to do and where to save. Saving for college as early as possible is strongly recommended. Just be sure to resist the temptation to start saving for college prior to providing the right answers to the “getting started” checklist items provided above.
If you are still working on getting your core financial plan headed in the right direction, funding college expenses out of cash flow or saving enough in advance may not be an option. That’s when two potentially dangerous options are considered by some parents: loans (Parent Plus loans, private loans, home equity loans, etc.) and using retirement accounts to pay for college. The goal for retiring with a sense of financial freedom for most people includes being debt-free at retirement. Taking on additional debt prior to retirement can be a major setback toward those plans. See Erik Carter’s Should you raid a retirement account to pay for college expenses? for an explanation of the tax considerations and other downsides of using retirement savings to pay for education costs.
Student loan debt has now approached $1.2 trillion dollars in this country. A college education still means a lot for many students, but too many young adults are “finding themselves” while their parents are finding retirement difficult. Fellow parents, you have a responsibility to take care of your children. You also have to take care of yourself financially speaking. Hopefully you will find a way to accomplish both priorities without compromising your own financial independence (however you define that concept).
It’s never easy to tell another parent that loves his or her child that they should put their own retirement first on the priority list. But that is how I’ve positioned my family’s financial plan and my love for my children is undeniable. What are your thoughts about the saving for college vs. saving for retirement dilemma?