Pay for college or save for retirement?

Parents today face a complicated dilemma when deciding how much to pay for their children’s college education. Isn’t a higher education the required entry ticket to a good life? We might want to give in ways our parents couldn’t. We want to give our kids everything we can. Perhaps even more than we can.

A guy I know was talking about his plan for his three kids: “I’m going to pay for the first year of wherever they want to go and then it’s up to them. I only have about $25,000 for each one.” I had mixed reactions to his plan. On the one hand I admired that he had saved and was able to give each child $25,000. On the other hand, emotionally, I felt that he was being less than generous. These are his kids, after all. What about the remaining three years of college? It is easy to fall into this trap, letting our emotions rule the decision-making process. We may end up making decisions that are not in our best interests.

I hear the “good parent” voice already proclaiming: “I will always put my children before myself! Why are we even having this conversation?” Emotions aside for a moment, let’s look at this problem from a few different perspectives.

One often-overlooked perspective involves calculating how college costs can impact your retirement, whether you’re paying for one year or four years. Imagine the effect that saving $25,000 per year for four years could have on your retirement plan. Let’s assume you’re 50 today and are planning to retire at age 70. If you invested that money to earn 6%, it would grow to almost $300,000 by retirement. If you have a lot of financial assets and feel well-prepared for retirement, this may not be a consequential amount. However, if you don’t, this could be a critical decision for your own future well-being.

How about approaching the situation from the standpoint of what you can realistically cover? How much can you save each year? How much have you been able to save up to this point? Look at what part of the costs you’d like to cover. This entails a close examination of your finances, seeing where your money is currently going and how to steer those hard-earned dollars where they matter most. This approach is grounded in reality.

Another perspective involves the idea that kids should assume some of the costs themselves. There’s something to be said for not handing over the prize on a silver platter. Such a gift can easily be taken for granted. Setting the expectation early that kids will need to pick up a portion of the cost can be motivating. It also gives them a vested interest in taking their studies seriously and can be a good lesson in saving for something really important.

Kids benefit from the process of applying to college. It is a big deal, requiring time and effort. They need to think about what to study and what kind of learning environment would best suit them. Filling out applications and writing essays encourages them to consider the bigger picture of their lives. This also includes how to pay for college. There is so much to learn and understand about financial aid, scholarships and loans, particularly the use of debt.

If parents take on all of the financial responsibility — and the kids don’t have to worry about the money — young adults are deprived of an important part of the decision-making process. Involving them in the shared responsibility for their education represents a big step toward maturity.

To sum up, I’d like to take some of the emotion out of the decisions about how, and how much, to pay for college. I’d even urge you to take care of yourself first. Take stock of your finances. Look at what you can realistically contribute. What you decide about paying for your child’s education could have a significant impact on your future.

It boils down to a question of priorities and values. The best argument for prioritizing retirement savings is that by being financially stable ourselves, we won’t be a burden on our kids in the future. And, unlike college, there are no loans you can take out for retirement.

Last and by no means least, if we can allow our kids the full benefit of owning their college experience, including the financial side, they will gain an appreciation of what it is like to make a major financial decision in a mature way and will see there are always tradeoffs involved. By being clear about our values, priorities and our money, we can make smart choices honoring our current needs and wants while taking care of our future as well.

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