As a parent, it’s natural to want to do all you can to help your child succeed – and for many, college is an important piece of the puzzle when it comes to setting their children up for success. Higher education comes at a significant cost, however. According to the College Board, the average cost of tuition and fees for the 2016-2017 school year was $33,480 at private schools, $9,650 for state residents at public schools and $24,930 for out-of-state residents attending public schools. Tuition increased 3.6% at both public and private universities from the 2015-2016 school year. It’s also worth noting the price of room and board. These costs are $10,440 at in-state public universities and $11,890 at private universities.1
The already-high and rising cost of college puts many parents in the position of feeling they have to choose between saving for their child’s education and saving for their own retirement — and many choose the former. It’s possible, however, to accomplish both. It’s also important to remember that if you continue to save for your own retirement, you can help reduce the risk that your college-educated child will have to support you later in life if you run out of money once your working days are over.
To begin, it’s important to realize that you likely won’t pay the full “sticker price” of your child’s college education.
Many families get a discount in the form of grants, scholarships and education tax breaks.
In addition, the soaring price of a college education has made it much less realistic these days for parents to cover the complete cost than it was in previous generations. In fact, more than two-thirds of students take out loans to help cover college costs. It’s entirely possible to contribute some money to your child’s education without paying for all of it. Understanding this could help you feel less pressure to devote all of your savings to a college account rather than continuing to contribute to your retirement savings.
It’s also key to keep in mind that while you can borrow money for college, you can’t borrow money for retirement — and if you’re like a growing number of Americans, you may find yourself in debt when you first retire, making it all the more important to have a sizeable nest egg to not only pay expenses but also to pay down outstanding bills. A recent study by the Employee Benefit Research Institute (EBRI) showed that among families headed by those 55 or older, 65.4% are still carrying debt loads.2
Finally, retirement savings plans have one major advantage that college savings plans lack: matching contributions. If your employer matches your 401(k) contribution, that’s essentially free money that college savings plans don’t offer.
That said, there are strategic ways to save for college while also saving for retirement, one of which is a 529 savings plan.
Sponsored by all 50 states and the District of Columbia, 529 plans let your savings grow and the earnings escape taxes completely if the withdrawals are used for qualified college expenses such as tuition, fees and housing. In addition, many states offer full or partial state tax deductions for contributions to a 529 plan.3 Also appealing is the easy access to these plans as well as their tax benefits. The plans set no income limit and don’t cap contributions — plus, most states give a tax deduction or tax break for contributions. Furthermore, if your child decides to forgo college, you can change the designation to a sibling without losing the tax break. You can even cash out a 529 plan for non-education expenses, although you’ll owe a 10% tax on any earnings (but not contributions). You may also have to return any state tax deductions.4
Both college and retirement are an exciting time of life and it’s possible to save for them at the same time. Taking advantage of programs like a 529 plan can help. As an example, putting $700 into a 529 plan with pre-tax dollars is like putting $1,000 into another account with post-tax dollars (assuming you have a 30% income tax rate). You could take that extra $300 and put it into a 401(k) or other retirement savings account.
The bottom line? By understanding the options available to you and utilizing all possible advantages, you can help improve the chances of supporting your child’s college education and enjoying your retirement.