College Savings for the Kids, or Retirement?

Many a financial advisor has been asked how to balance saving for retirement while also funding a child’s college education. Which brings up the question: Is it a parent’s responsibility to pay for their child’s education? And is it possible to do both? As with most difficult questions, there are no black and white answers.

While I’m not a parent myself, I’ve heard passionate positions on both sides of the argument. Some parents didn’t receive any college financial support and feel pride in having paid their own way, working and going to school part time in order to earn their four-year degree. Others, myself included, felt fortunate enough to receive monetary support from their parents, and the gift of graduating with a four-year degree debt-free. In a perfect world, most parents would choose to provide for their children’s education but unfortunately not everyone has the income to do it. In that case, what is the best course of action?

Before tackling that question, there is some good news. A recent Gallup Poll shows that expensive, prestigious colleges don’t necessarily produce happier people who lead more fulfilling lives. Specifically, graduates of colleges in the bottom-ranked U.S. News & World Report schools faired just as well as graduates from top-ranked colleges in terms of overall well being. The poll looked at several quality of life factors, including income level and “engagement” in graduates’ careers. See the article here. Of particular note, high college debt loads had a meaningfully negative impact on graduates. Sadly, 70% of students who borrow have a national average debt balance of $29,400.

I would tend to agree with these findings. As a state university graduate (go Gators!) I received a great education, learned and worked with some world-renowned scholars, and feel pretty darn satisfied in my life and career today. All-in, college cost my parents about $12,000 a year. Granted, that was seventeen years ago. Today, attending the University of Florida costs about $21,000 a year, including room and board; still a pretty attractive price tag considering sky-high tuitions at some of the top private colleges and universities. Don’t get me wrong, if money had been no option and my grades were a little better back in high school, I would have jumped at the chance to attend an Ivy League school. Such were not my cards. The point, however, is that state schools often offer a phenomenal education at a fraction of the cost of many private schools which can make the dilemma of whether to save for your retirement or your child’s secondary education a little less challenging.

However, different students have different needs and may be searching for what those more expensive colleges offer – whether that’s a smaller setting, specific academic programs or special facilities. So if your child is interested in what the pricier schools have to offer, consider applying even if you don’t have all the funds available to pay. Some of the most expensive schools have a tremendous amount of scholarship money available for qualified students in need. It’s a great reason for your child to stay motivated with grades and extracurricular activities throughout high school.

But back to our main question: should you save for your retirement or your child’s college education? Ideally, everyone would do both, but given a median US income of about $51,000, this isn’t always possible. Taking an economic perspective, the classic airplane analogy comes to mind: when the oxygen masks come down due to a drop in air pressure, air regulations require parents to first secure their own oxygen mask before helping their child. Why? Because we can’t take care of someone else, children included, until we’ve first tended to our own needs. I believe the same holds true regarding retirement savings and a child’s college education. Funding your child’s college education at the expense of your retirement savings plan implicitly shifts the financial burden of retirement from parent to child. Essentially, parents who first try to support their child at the expense of their own retirement are making the bet that their child will earn more than them, or at least enough to provide for them in their twilight years. While parents may have good intentions, this dynamic can ultimately prove unhealthy for all parties involved. As with the oxygen mask analogy, a sound strategy would suggest first meeting your own retirement savings needs and then, as you’re able, contributing to a child’s college fund. In the end, you’ll have peace of mind regarding your own financial security and likely be in a better position to further support your child – who may just be thriving on her own.

Carrie A. Tallman, CFA
Director of Research

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