The decision to save for our children’s education or retirement is a vexing one. For me, the bottom-line is that there are no scholarships or grants available for retirement. Don’t misunderstand, I am not suggesting our children’s education is unimportant and not worth our money. It may be possible to fund both. I’ll come back to that in a few moments.
When it comes to saving for retirement, our use of work place programs such as 401Ks is critical. Historically (in the 1800s and before), folks were self-sufficient in later years or relied on family support. This practice has reemerged as pension programs have been cut in corporate America and are changed in federal, state, and local governments. While, I can’t predict what government programs for retirement will be available in the future. I know that creating a savings pool will help take better care of myself and my family no matter what government or employer programs are available.
The Internal Revenue Code carves out tax-favored savings plans such as IRAs, 401Ks and 529s. Generally, Congress has provided more options with retirement type plans including the ability to take money out of IRAs for education with no early withdrawal penalties. The college 529 plans do not provide the reverse benefit of penalty free withdrawal of money for retirement purposes. Retirement plans have another advantage over education plans under the current system as retirements plans are excluded assets in the college aid equation on federal and private student aid applications.
I believe saving for retirement shows our kids the importance of developing self-sufficiency and making financially responsible choices throughout life. At the same, I, also, believe, a college education can help with our children’s economic success.
Our decision to fund the schooling of our children is important. We want our kids to succeed and be set up for success when they leave the nest. I believe that part of our job as parents is to give them more and more age appropriate responsibility as they grow. For me, part of this includes having my son value his education by having some “skin in the game.” Specifically, this means that he will need to help fund his education. Education can be paid by parents (or other relative) or the student. Kids owning their responsibility are more likely to do well in high school, apply for scholarships, seek other forms of non-loan assistance, and finish college in a timely manner.
A colleague, Bert Whitehead, suggests college be paid 1/3 by parents, 1/3 by the student, and 1/3 by student loans. This concept provides a balance between a parents desire to provide and a level of responsibility for the kids. How do loans fit in the balance between parent and child?
Student loans can be taken out in the student’s name and/or that of the parents. Parents that allow their kids to take out student loans only in their student’s name have the option to help repay the loans after graduation and, legally, are not obligated to do so as if their own name was on the loan. This gives parents options including not telling their kids they will help repay the loans. Not telling their children they might help repay the loans helps to keep the kids head in the game and focused on wise use of the loan dollars. Repayment help from parents can also be conditional on grades or graduating on time. Loans can be a useful tool to have kids be responsible for their education while maintain a parents desire to help pay for the education. Loans also give parents the opportunity to continue saving a portion of their income for retirement before, during, and after the college years while spreading out the cost of college over more than 4 years.
The choice of whether to pay for college or fund retirement savings does not have to be a one or the other choice. While retirement should be primary, there are ways to fund education and strike a workable balance between two of the biggest financial objectives that parents face-college and retirement.
Look for next week’s posting on kids and phones.