It’s no secret that many American parents want to support their children by paying for their college education.
According to recent research from Student Loan Hero (Survey 2021), 92% of parents today have already paid or plan to help with these costs. Furthermore, 68% of parents said they would consider withdrawing from their retirement savings, which could delay retirement, to help their children pay for college.
While the option to defer retirement to pay tuition is understandable and impressive, the reality may not be the wisest financial decision. If you’re thinking about how to balance saving for college and retirement, read on to get some perspective.
Prioritizing college or retirement bills?
Although it may be hard to hear, saving for retirement should take precedence over college tuition. To understand why, consider the following:
You may not get to choose your retirement date. Injury, caring for an elderly parent, or layoff are among the factors that can ultimately make the decision for you.
You don’t want to run out of money in retirement. If your savings are low, you do not have the ability to apply for scholarships, grants, or financial aid to help fill the gap. (Your child can access these options to help pay for college.) Instead, your options are more likely to work longer, find other sources of income or spend less on travel and other retirement dreams.
While it is essential to focus on your financial security when you retire, financing higher education is still an important goal for many parents. The key is to strike the right balance between saving for both goals. Consider the following tips as a starting point:
1. Paying for college doesn’t have to be all or nothing. Many parents choose to pay a percentage of the total bill, cover certain expenses (such as tuition, technology fees, or room and board), pay for a set number of years, or contribute as much as they can save by the first day of school rather than fund the full cost. Revising your college savings goal in one of these ways may allow you to direct more money into retirement.
2. If your child is looking forward to graduate school, decide if you will contribute to these bills as well. This decision is especially important if your child needs a college degree before entering his chosen field. If you intend to provide financial support, calculate the amount of the total cost so that you have a clear savings goal in mind.
3. Discuss your intentions with your child. No matter how much you contribute, talk to your child (if and when your child is old enough) about your financial commitment so he or she knows what to expect. Discuss what your contribution to their favorite colleges would look like. For example, if you agree to pay a set amount, perhaps that money will cover the entire community college, a large amount at a public school, and leave a larger portion of the bill hanging at a private college. Dividing the costs onto your child can help make an informed decision about how much student debt (or scholarships, grants, etc.) is needed to cover the bill.
Regardless of your financial situation, know that it is possible to make tangible progress toward both goals, especially if you are deliberate about how you allocate your savings. Consult a financial advisor and tax professional if you want help setting specific savings goals and understanding the various investment options available to you.
Holley Smaldone-Cragg, CMFC, is a financial advisor at Ameriprise Financial in Geneva. She specializes in fee-based financial planning and asset management strategies and has been in practice for over 35 years. Her website is ameripriseadvisors.com/holley.com.