Parents who choose to pay for a college education for their children have a steep mountain to climb. The average cost per year of a four-year in-state college education in 2016 was just over $20,000, according to College Board data. For a private college, the cost more than doubles.
Though parents may feel inclined to do whatever it takes, paying for a child’s college education should be secondary to your retirement. Aside from Social Security, you’re on the hook for your own retirement. College bound students can find lower cost tuition, scholarships, loans and work-study programs to pay for school, and they have their entire careers to pay off their education bill. You only have one retirement, and the money needs to last.
But with early planning and discipline, you can help pay for college for your children and retire comfortably. Here are some tips to ensure you won’t need to delay your retirement to pay for higher education.
[Read: How to Prioritize Retirement Versus College Savings.]
Start saving early. If you plan to fund the cost of your child’s education, the most effective action you can take is to start saving early. Starting when a child is born gives you 18 years to save and invest. That is significant time to allow your investments to compound and grow. If you can, maximize tax-advantaged accounts early. The compounding effect is more powerful when gains are tax-free.
Not everybody starts saving when a child is born, but that doesn’t mean it’s too late. If you want to assist paying for your child’s higher education and haven’t started saving yet, start today.
Have a comprehensive plan. Make saving for college part of your comprehensive financial plan alongside retirement planning. Start by using an online calculator to estimate the cost of a four-year education when your child is expected to attend college. Determine a target savings goal based on the estimate, then choose a monthly savings amount and investment strategy to reach it.
Include college savings in your monthly budget from the day you commit to paying for school. Automate your contributions to investment accounts to consistently save for your child’s future. Invest in appropriate funds for your child’s age and reduce risk as he or she approaches freshman year. Or consider an age-based target fund that adjusts automatically over time. Make sure to include a withdrawal strategy in your comprehensive plan for when it’s time to pay for tuition.
Use tax-advantaged accounts. The 529 plan is the go-to tax-advantaged savings account for many parents saving for college. Money invested in 529 accounts grows free of federal and state tax. Distributions are also tax-free, provided the money is used to pay for the cost of higher education for a qualified recipient.
Many states also provide tax deductions for contributions to a 529 plan for residents, meaning you can lower your state tax liability by saving for college. The 529 contributions are not tax deductible on your federal tax return. Limitations vary by state, so make sure the 529 plan and provider you choose gives you the maximum benefit for where you live.
[Read: How to Cope With Student Loan Debt in Retirement.]
Highlight return on investment. The average lifetime earnings of a college graduate are more than double that of a high school graduate, according to a Brookings Institution analysis of Census Bureau data. Even as the cost of a college education rises, it still provides an excellent return on investment over a lifetime.
College costs vary dramatically between community colleges, state schools and private universities. But lifetime earnings are correlated more closely to education level and degree rather than college selection.
High school students may not think about the cost or value of college as much as the experience and education when selecting a school. As your child begins his or her search for a college, explain the value of an education in relation to the cost and how degree earners in certain disciplines earn more. Doing so may help shape their major selection and college choice, especially if they are responsible for funding all or some of their own education. By choosing a lower cost college and higher paying degree, attending a less prestigious college won’t negatively affect their long-term earning potential.
Borrow to pay. Many parents choose to fund college by tapping home equity loans, private or federal student loans or other borrowing means. Make sure the planned payback period does not drastically alter your target retirement age and the payments fit comfortably into your regular budget.
If you choose to borrow to fund your child’s education, set reasonable tuition limits with your child to avoid higher cost schools. Ask your child to cover expenses such as books and spending money by working at school and during the summers. Try not to borrow more than you need to. Aim to pay for some tuition out of savings and current income if you’re still working. Carefully plan and execute your borrowing strategy so the loans and payments don’t impact your ability to retire.
Partially fund college tuition. Offering supplemental support for your child’s college costs is better than no help at all. Determine what you can afford to contribute and clearly communicate the numbers to your child. Your child will need to make other arrangements for loans and work while at school.
Do not offer to co-sign on student loans unless you’re prepared to pay them back yourself. If your child later defaults on payments, you’ll be responsible. This can damage your credit and put the burden of payment on you, potentially derailing your retirement.
[Read: How to Balance Retirement Saving With Other Financial Goals.]
Don’t pay for college if you can’t afford it. Not everyone can afford to pay for college for their children. Paying for school isn’t worth sacrificing your own financial security.
Support for college isn’t limited to paying for it. Guide your children when deciding on a school and major to keep tuition low and earning potential high. Offer your home as a residence during school to help your children save on room and board. Help your children identify scholarships, and encourage them to apply. When your child graduates and student loan payments begin, you can always offer to help pay off debt if your financial security and retirement savings are on solid ground.
Craig Stephens is a blogger at Retire Before Dad.
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Kids Headed to College? Don’t Let Them Delay Your Retirement Plans originally appeared on usnews.com
