We love our children. Most of us would do anything for them. That includes saving for or paying for their college tuition, even if it means sacrificing a retirement lifestyle we may want and deserve.
There’s no doubt about it, college tuition is expensive. It’s so expensive these days that it’s not uncommon for young people graduating with college or post-graduate degrees to have hundreds of thousands of dollars in student debt. That student debt, by the way, is now often referred to as the student debt bomb.
One woman I talked proudly bragged about the fact that she had put her daughter through an Ivy League university. The only problem was she was in hear early 50s and had saved nothing for her retirement. That lady will likely have to work longer than she had planned or expect a lifestyle in retirement that will be less than she probably dreamed.
The older you are, the more difficult it can be to replace the money you have saved in retirement, especially in an era of layoffs and long-term job uncertainty. And there is no way to make up for the power of compounding, which is responsible for your growth in savings over the years.
Also, most people have not saved enough for retirement already, which means they will have to adjust for a standard of living in retirement that is less than what they are used to.
So, some advice to help others from making the same mistakes.
Consider a 529 plan.
“Take advantage of college funding though a 529 plan that allow you to put money away for college education,” says David Evans, founder of Evans Financial in Shreveport, La. “It grows tax free. If used for secondary education, the gains are tax free. If you are saving for two kids and one doesn’t go to college, you can change the beneficiary. If used for anything other than college, they will pay tax.”
Using a 529 plan, a person can grow savings on behalf of a beneficiary, who could be a child or grandchild, a spouse or even yourself. It can be established by anyone, including non-relatives, for a designated beneficiary. There is no limit on the number of 529 plans an individual can set up, but contributions should not exceed the cost of education or the limit as set by the state.
There are two types of 529 plans. Prepaid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan.
One couple I talked to opened 529 plans for their children and urged their parents and other relatives to sometimes make contributions in lieu of holiday and birthday gifts.
Consider a loan to fund some or part of tuition.
I hear it all the time from financial planners. You can take out a loan to finance your child’s education, but you can’t take out a loan for retirement.
Understandably, many parents don’t want their children graduating college with hundreds of thousands of dollars in debts. One option would be for a parent to finance part of the education and the child or children finance a part.
“Start early in saving for college,” says Evans. “You have 18 years. It’s not all due in September after they graduate high school. Say you are saving $40,000 for college. You don’t need it all in September. You might pay $10,000 for first year, $10,000 for second year. Take loan over the entire period. People make assumption I have to have $100,000 for college all in September. You can continue to fund and pay for it over a period of time.
“If your kid gets out of school, help them,” he says. “Tell them you pay half and I pay half.”
Start early and research college scholarships and financial aid.
“Lots of scholarships out there aren’t taken advantage of because no one applies,” Evans says. “Look for scholarship and make that an almost full-time job in sophomore and junior years of high school.”
Evans says also foundations have money available for scholarships, sometimes reserved for people who are about to study a particular discipline.
“Money out there, and it’s not all us,” Evans says. The cost of that for the parent is just the time and doesn’t take away from their retirement savings.”
One parent has her children make a deposit into three jars every time they get money, whether it’s from relatives or work. One jar is for church and charity, the second is for savings and the third is for spending money.
Parents will find that certain strategies may work for one parent, but not them. So, it’s important to get started early and figure out what works for you. What you don’t want is to have to make a choice between your child and your retirement. The last thing a parent would want is to run out of money in retirement, and have their children be forced to take care of them.
This article is for informational purposes only and is not intended to provide any specific financial advice. Be sure to discuss your needs and goals with qualified financial, tax, and/or legal professionals.