As Generation X continues to age, build successful careers, and start families there comes a time when parents need to weigh two important financial options. Save for college, save for retirement, or somehow try to do both. As we see college tuition spiral out of control and realize that Social Security is a laughable retirement benefit it becomes clear that there probably isn’t enough money to go around.
If you have children it is probably important to make sure they are provided an opportunity to seek higher education later in their life. As most people are aware, the cost of college education is not getting any cheaper and in fact it is rising even faster than inflation. To help encourage parents to save for their child’s education there have been many tax incentives and specialized savings plans introduced. While these can be very beneficial ways to save they still may not be enough. Even if they are, parents can actually jeopardize their own retirement because of aggressive college savings.
Your Personal Needs Come First
If you have a family there are a few issues that need to be addressed before you start stashing away money for college. First and foremost is some sort of emergency savings. I hate to hammer this topic into the ground, but if you are married and have children it is more important than ever to have some money set aside in the event of a loss of income or some other significant emergency. Without this fund you would likely find yourself having to tap into other assets to cover the emergency. Whether it is a credit card, retirement plan or even college savings plan, tapping into these can cost a lot of money in either finance charges or taxes and penalties assessed for early or unqualified withdrawals. If you are a little thin in the savings category I encourage you to open a savings account right now and start putting some money away. Even $20 a week is better than nothing.
The second thing to consider is whether or not you are adequately insured. Again, when you have a family and your income supports either part or all of the income your family needs, your life and the ability to work is your greatest asset. Would it make sense to be tucking money away into a college savings plan when you don’t even have enough life insurance to pay for your funeral in the unforeseen event you lose your life? That event could prove devastating to your surviving family.
What About Retirement?
One of the biggest conflicts people face is when they have the basics covered and then try to fund both retirement and college savings. Should you just fund retirement and ignore college savings? Should you wait and begin to focus on college savings aggressively as your child approaches the time to attend college? Or do you find something in between?
Considering that most people can’t even find a way to maximize their retirement savings I don’t think putting a high priority on college savings is a very good idea. One thing about college is the number of unknowns. One thing is for certain about retirement, and that is we will all have to stop working someday whether we like it or not. We will get old and we will reach a point where we are either physically or emotionally unable to work enough to support ourselves fully. You can paint any picture you want about how long you plan on working, but you will face a point in your life where work just isn’t an option.
With college there are plenty of unknowns that could affect the need or use of funds. Will your child go to public or private school? Will they have the grades to attend anything more than community college or a trade school? Will they excel at a sport and receive a scholarship? Will they do outstanding in high school and receive scholarships? Will they aspire to attend an ivy league school? Will they decide to become a lawyer or doctor that requires many more years of graduate school? Whatever the case may be it should be obvious that in the 17 or so years after your child is born that there are many different scenarios as to what will happen. If you think about it in betting terms, would you bet on a sure thing (retirement) or put all of your money on black at the roulette table?
What if You Want to Provide an Education For My Child?
Many parents want to be able to provide an opportunity for their child that maybe they may not have had. Some parents may not have even gone to college while others may have had to foot the bill for themselves and don’t wish that upon their own child. This is a noble aspiration and clearly weighs on the minds of parents. But before using this to justify your college savings plan take a moment to consider some of the alternatives.
The problem is that there are many ways to fund an education, but very few ways to fund retirement. If you want to retire will the government give you a loan? No. Will the government give you a grant or can you receive a scholarship for retirement by proving how much you’ve accomplished in life? No. Can you continue to work while in retirement to pay your way? Yes, this is something you actually can do, but then is it really retirement? Also, as you age you may not be able to physically work. One thing people forget is that our health is largely unpredictable as well. It may seem like a perfect plan to continue to work once you retire from your primary job in order to receive additional income, but l who’s to say you won’t find yourself diagnosed with cancer or another debilitating condition that prevents you from working? If that happens you are in a very difficult situation had you not saved enough for retirement.
The bottom line is that there are a number of ways to pay for a college education:
- The student can work part-time: This one is actually a great option because it can not only provide money to get through school, but many times the line of work can be related to studies and actually help the student in getting that first job upon graduation.
- Student Loans: At the very least you can get student loans to pay for education. I understand that this can later become a significant burden on the student after graduation but the money is available either for part or all of the tuition expenses if absolutely needed.
- Scholarships and Grants: This item is often overlooked. While this can require some work and possibly good academic records in order to qualify there are a ton of opportunities out there to receive money. Take an active role and work with your child before they graduate high school to help spot these opportunities.
- Attend a cheaper school: I remember my senior year in high school and I had these great aspirations of heading across the country to attend a big university. As a kid it sounds great, but for parents that can mean double or even triple the tuition. Unless your child needs to attend a certain school for their degree program urge them to look at in-state public universities that can be a fraction of the cost.
These are not all-or-nothing options, either. In many cases you can utilize a combination of all the above in order to make even a somewhat expensive college education affordable. Once you look at a cheaper university, get a thousand dollars here and there for scholarships, and make about $6,000 or so a year working part-time while in school and during the summer and you could be in a situation where you only need to borrow a few thousand dollars to pay for a full year of school. Or if you’re a parent looking to pay for that, now you only have to pay maybe $5,000 a year instead of footing the entire bill.
What Should You Do?
None of this is to suggest that saving for college is a bad idea because it is a great idea that many people don’t have the luxury of doing. The thing to remember is to keep your priorities in order. First you need to be sure you are in a position to provide for your family in the event of an emergency or death. This is a first-line of defense that could make a difference in how your child’s life plays out in the event of something happening. Next you have to make sure you are doing what you can to prepare for your own retirement. Whether you like it or not you will have some form of retirement. The government won’t be there to bail you out. Expecting to rely entirely on Social Security is about the same as living your golden years in poverty.
This isn’t to say that you need to be completely maxing out every retirement plan you have before you should save for education, but it is important to ensure you are not sacrificing your emergency savings or retirement funds by saving for college. Remember, in a worst-case scenario even if you haven’t saved a dime for education your kids still have many options in order to get their education.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
To put it even more simple. If you "could" put away "would" you?...I think most if not all would say yes. If you are unable then there are numerous options available, that's not the question. I think there are a lot of people who default to "I need to take care of myself first" duh...when I counsel clients I go in this order. Retirement, life insurance THEN education.
Interesting article. I am still quite young. So I have not saved much for retirement yet. Still I realize that it helps to start saving early. I have had to pay off student loans, but luckily I had financial support from my parents. It must be quite tough for those who have to pay for all college expenses on their own.
This is one of the main reasons that I use a Roth IRA - I can save for both retirement and education at the same time and then as my daughters get older make decisions about how much can go to education based on schools, scholarships, and retirement needs.
I agree with David who refers to Suze Orman. I am a parent, I love my children, but I have to make sure that I will be ok in retirement before I makes sure that I can pay for college. I certainly do not want to become a burden on my children when I am a very poor old man.
I also question the value of a college education. It is not like a bachelor's degree is the ticket to a good job these days. Maybe it is better to learn a solid trade which can also lead to a fulfilled and prosperous life. Just think about how hard it is to find good craftsmen these days?
Younger families are focusing equally on retirement planning and paying for college education while older families put more emphasis on retirement planning according to an edward jones report from about two weeks ago.
options that no one has mentioned: help them go thru a tech school, after which they can be earning money and socking some of that away to get a college education. or have them join the armed forces which have the GI bill (and if you join the navy or the air force, less chance of getting shot). not an option for everyone, i know, but these are workable options. at this point in time the chances for a locked and loaded career are dwindling anyway and fewer and fewer people are working for any company long-term, or even in the same career field. that's just life in the 21st century. They will gain skills from having to put themselves thru college. they will value it more when they are the ones making the effort to put themselves thru college.
i paid for my own college. i worked the whole time i went, sometimes more than one job. this took a tremendous burden off my parents who then spent $15K for my sister to go to Syracuse for a year before she quit. but i had no guilt when i decided not to be an engineer (my dad's dream, not mine) and did a different major. i had no guilt when i decided to quit school to join the navy and become a linguist. i did not take any loans. i had no school debt when i quit and the navy gave me the GI bill, which would have allowed me to finish school had i had the opportunity to take advantage of it (another story for another time).
there are options for our kids that don't include them having to foot the bill to take care of us when we are old. (my mom did not save ANY money, is dependent on ssdi right now and needs my help just to have a somewhat decent life (shelter, food etc)...so just remember that when it comes time to choose between your retirement and sending your kids to college. help them not have to support you in your old age :)
Let's not overcomplicate this. We have to take care of ourselves, and then we can take care of our kids (note the airline reminder: if the air mask falls, put it on you first, then the kid; we have to be able to help them to actually help them).
I married late to a woman with teenage twins. She had no savings for them; obviously I did not, either. We got ourselves established financially about the time they were planning to go to college. We said we could pay $4000 a year each, but no more. They needed to make decisions around that. It turned out one got a track scholarship and needs little or no money from us. Who could have reasonably predicted that? The other elected to go to a junior college with expenses around $8000 a year. She realizes she can make this in summer jobs while living at home. It gets a bit more interesting the last two years of college when a state school (Texas) costs around $15,000 a year. She'll have to work during the school year and maybe take out a loan or two; I'm committed to her graduating with little or no debt, a decent degree, and a decent car. Nothing more.
Moral here? It's pretty simple. Be honest with them, protect yourself first, provide guidance and education to them, and hope they make the right decisions. In college it's time to grow up, and they are. So far we are proud of them, and our financial help is just enough for them to know they don't need to worry but they do need to work and be diligent. Not bad life lessons.
Suze Orman made a great point about this. She said you need to save for retirement before helping your child save for college because that child has their whole life to make money and invest, but your time horizon is getting smaller and smaller.
So instead of saving for your child's college education, first make sure you are stashing away for your retirement. Your time horizon is getting too short to risk not doing so!
Also, if need be, you can borrow against your retirement funds for college but not the other way around.
A couple of other "middle-road" options: you don't need to be able to pay for ALL of your child's/childrens' tuition. You can just chip in what you can *while* they attend. And also, it must be said, not everyone is even meant to go to college or university. Don't force or expect that your child should do this. A two-year diploma program can get your child started well on a path that might be more fulfilling for them, anyway, and will definitely have them working sooner and in less debt. It's not even always about having the best grades. Your kid could be an A student yet still benefit more from a community college program where they can become independent much sooner than through a traditional university.
According to me you have posted perfect article and what i want to say is if you think about retirement from the young age then you will definitely enjoy secure future.
This is a difficult decision for parents to make.
But I think that if you decide on having kids - you need to be able to afford them (this includes paying for college - whether you let them know about you paying for them or not). After all, the parent is the one that chose to have the child.
But if you're a parent that cannot afford to put your kid in college - then the best thing to do is be involved in your child's education from day one so that "maybe" he/she will be able to get enough scholarship money to go through school.
Even though working part-time or even full time is a possibility - parents should not rely on this. For one it's quite stressful to work while go to school full time. I did it when I was in college and even though I made it out - I had no life. Plus I wasn't able to reach my full academic potential because I was always stressed out.
Of course there is always the student loan option - but it wouldn't be worth it if you kid ends up with a ton of debt and only gets paid little to nothing once he/she graduates from college - depending on what their occupations are or who they're working for. The world is a competitive place - look at what kinds of obstacles your child might face and try to take soften the blows.
As long as you don't leave your decision as a surprise to your child, I think it's totally okay (and not something anyone should feel guilty about) to not chip in for college expenses.
It was made blatantly clear to me that my parents couldn't afford to chip in at all. And guess what? I got enough scholarships to graduate with my BA completely debt-free. If I were going to have kids, I'd make it clear from day 1 that they were going to be solely responsible for that expense.
I agree with you Micki. I also paid for my education. When I finished high school in 1988 I went to a two year school and finished a double major with no student loans. I was 22 with no debt because, I worked two minimum wage jobs. I went back to school at age 27 and the company I worked for paid for most of my education. I finished at age thirty. My husband and I do not have children by choice. Pretty soon people will not be able to afford kids just like we can't afford education or retirement.