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.