It’s a question that confounds some clients and probably has them turning to you for guidance: Do I save for retirement or for my child’s college education?
The conflict may not be wholly financial. Some parents may consider paying for a child’s college education to be a moral obligation. For others, choosing retirement over their child’s education may feel selfish, and that parental guilt has the potential to lead to poor decisions.
No matter the motivation, the most recent statistics indicate that parents continue to be the largest contributor to their children’s education:1
- American families spent an average of $26,373 on college in the 2020-2021 academic year
- Parent income and savings covered the largest portion of education costs at 45% (nearly $12,000 on average)
- 85% of families relied on at least some parent income and savings to pay for college
- Scholarships and grants covered 25% of tuition
- Money borrowed by students and parents paid for 20% of the total cost on average
- Students covered only 8% of their tuition costs
So, where did parents come up with that kind of money? In addition to their regular income, 16% of parents withdrew funds from a retirement fund and 42% dipped into other savings or investments to cover college tuition expenses.1
Is there a return on investment?
Paying for college may help ease some guilt, but delaying or foregoing retirement savings contributions may result in well-meaning parents running out of money in their golden years. What then? Some parents might assume their grown-up kids will be there to help, but it’s a return on investment that may not come to pass.
By the time parents reach retirement age, their children could be trying to save for the education of their own children. And they will likely try to save for their own retirement and have other expenses. Children simply may not be in a position to help aging parents financially.
Should parents practice tough love?
Parents who have struggled with student loan debt of their own may view efforts to relieve their child of that same type of burden as “doing what’s best.” After all, costs for college tuition, fees, room and board have more than tripled over the past 30 years, according to the National Center for Education Statistics (NCES).2
Education is not cheap, but remind clients that it doesn’t have to be all or nothing; parents do not have to shoulder the expense alone. There may be funding alternatives available to college students (such as student loans, scholarships and grants) that simply aren’t an option for retirement savings. It may not be what clients facing this choice want to hear but, as their financial advisor, you can provide objectivity in a situation they may be too close to emotionally.
Encourage your clients to look at key areas to determine whether they can afford to pay for a child’s college education. Ask the following questions to help parents understand what they need to prioritize financially for themselves and their future when deciding whether to help a child with college tuition:
- Does your budget cover your basic needs? If monthly bills are paid but there’s no room for discretionary spending, or if financial stress is a constant from month to month, financial security may be in jeopardy. Focusing on putting more money aside to help cover the basics might take precedence over saving for — or paying for — college.
- Do you have an emergency fund? Life happens, and it usually comes with unbudgeted expenses. If three to six months’ worth of cash isn’t tucked away to cover unplanned events that arise in the short term, building an emergency fund may need to happen before saving for a future college education.
- Do you have a handle on paying down debt? Before acquiring more debt to pay for a child’s education, parents must have a clear picture of their existing debt, and a proactive strategy for paying it down. Eliminating debt-related expenses could eventually mean more money in the college savings fund.
- Is a 529 plan an option? It may not be too late to begin setting money aside in a 529 qualified tuition plan. Savers are generally allowed to choose from a range of investment portfolio options which have the potential to grow over time. Such plans typically offer tax benefits that will vary by state, and money can only be withdrawn for qualified education expenses.3
- How much are you saving for retirement? Contributing to a retirement fund now means more years for the money to grow. There may also be an opportunity to capitalize on employer plan matches and tax breaks to further shore up the golden years. Ignoring long-term financial security in retirement in favor of paying for college might come with unanticipated consequences.
Clients considering the college vs. retirement debate may not ultimately choose the prudent path for their financial futures, but you can help them manage the retirement resources they have by managing market risk and limiting loss.
Undoubtedly, emotions play a big role in a client’s decisions about a child’s future, let alone their own. One way to help your clients manage these emotions is by going through various exercises available through our Behaviorial Finance Advice (BFA™) program. These science-based resources can help you and your client explore their motivating factors, underlying values and other issues, helping them to make more reasoned decisions. Click the button below to access these tools now.