The Parents Dilemma – Saving for College or Retirement

Should we save for college or should we save for retirement?

Whether your little ones are in diapers or about to head off to college, if you are a parent you have probably asked yourself this question over and over.

The hefty price tag of higher education seems to be increasing every year. According to the College Board, the average fees for four years at a private college is now more than $150,000 — including $38,589 for the 2012-13 school year. Even going to your state’s university, it costs close to half that total at an average of $17,131 a year. As a result most graduates have amassed significant amounts of student loan debt by the time they enter the workforce. You don’t want that for your children. You want to give them the best start in life, right?  After all, good parents are selfless and ready to sacrifice anything for the wellbeing of their babies.

Most experts agree than when it comes to deciding between saving for college or retirement, just wanting the best for our little ones should not be the deciding factor as emotional reasoning should not be applied to this all important decision. This is of course not to say that you should not save for college. It is essential to approach the college saving decision rationally, and carefully balance saving for college with working towards the remainder of your family’s financial goals such as being debt free and being 100% certain that you are going to be able to retire comfortably and when you want.

As parents we learn to juggle so much and here are a few considerations to keep in mind while balancing college and retirement savings.

When in doubt, choose retirement. Reasons are simple and not necessarily selfish. Unlike college education, loans, scholarships and financial aid are not available to finance retirement. Since defined benefit pension plans are almost extinct these days, most of us only have Social Security and our own savings (401(k)s, IRAs, etc.) to rely on. Many employers offer a match on employee contributions in 401(k) accounts. If your employer does, do not forgo the opportunity to take advantage of this free money. In addition, if you fail to save enough and are not able to retire comfortably, you may in your old age become a burden on those same children whom you tried to protect from being overwhelmed with debt.

Start early. Remember your best friends – time and compound interest. Give them a chance to do their magic by starting saving for college early. If you open a college fund when your child is born and invest $100 every month until it is time to pay tuition bills, assuming an 8% return on investment, in 18 years, the balance will be $48,000. While this may not be enough to cover all college expenses, it can contribute to a significant portion. It all depends on how much of the total higher education expenses you have decided you are going to cover.

Set expectations and communicate them with your children. This is a very personal decision and it depends on both your financial situation and your parental approach but however much you are going to contribute, make sure you set the expectations and communicate them to your children so they know what to expect. You may decide that you are going to pay for undergraduate degrees only and anything in addition (Master’s, MBA, Professional degree) your child will have to finance on their own. Perhaps you only cover tuition and encourage a part-time job or loans to finance the rest. Instill the right values in your children, encourage them to recognize the value of education and strive to be the best. There are plenty of merit based scholarships for students with good grades and high scores on standardized tests.

Get grandparents and relatives involved. Leverage the thoughtfulness and generosity of grandparents and relatives and suggest that instead of buying toys and cute new outfits for holidays and birthdays they contribute some or all of the money they ordinarily spend to the child’s college fund. Again, this is a personal decision and it depends on values and priorities but even if could get a few relatives on board, with time and compound interest on your side, you may be able to help cover a semester or two.

Consider the tax implications. Even if you end up financing some of the education expenses with loans, remember that there is a student loan tax deduction. You may deduct up to $2,500 per year in the interest paid on student loans if your modified adjusted gross income is less than $70,000 if you are single or less that $145,000 if you are married filing jointly. This deduction can be taken for the life of the loan.

Also, you may be able to take two federal tax credits - the American Opportunity Tax Credit and Lifetime Learning Credit - in the years you pay tuition.  Make sure you work with your tax professional to see if those apply to you.

Have a customized plan in place. College savings and retirement savings are not mutually exclusive and do not have to become the parental catch 22. Many factors play a role – when do you expect to retire, when are your children expected to head off to college, how many do you have, and are they likely to attend expensive private schools or the state college. Just one possibility is ramping up your retirement savings when your children are very young while saving a nominal amount for college and then when the kids are in high school do the reverse. There are so many strategies to consider and the good news is that with the right financial plan in place it is possible to do both and strike a balance.

And at the end, you may be able to admire your Ivy League graduates without having to move in with them.