Saving for College vs. Saving for Retirement
Eileen and Michael Sinopoli want to refine their juggling act.
College? Retirement? College? Retirement?
With only so much money to go around and two children, 9 and 7, the Williston, Vt., couple is searching for the right balance.
"My biggest concern is not having enough money put aside and that we will cannibalize our retirement to pay for college,'' says 41-year-old Eileen Sinopoli.
Sinopoli is right to have concerns. The rising cost of college is enough to knock even the most well-planned budget out of whack.
The average cost of a four-year private college was $26,273 for the 2009-2010 academic year -- up 4.4 percent from the year before, according to the College Board. The average cost of a year's worth of tuition and fees for a four-year public school jumped 6.5 percent to $7,020. Those figures include room and board.
How can you do it all? Maybe you can't. And maybe you shouldn't.
Even if you work hard and start saving early, most parents can't fully fund their retirement and college educations for their children.
People have unrealistic expectations, says Chris Cooper, a certified financial planner in Toledo, Ohio. "What happens is most people compromise both college and retirement so that they don't really accomplish what they thought they were doing,'' he says.
The vast unknowns of your child's college future make it hard to know how much to save. For example, you save for a public school but your child is accepted to an Ivy League school -- Harvard University cost more than $36,000 in tuition and fees last year. Or you save for a public school in a fiscally strapped state like California only to find that tuition and fees in the University of California system jumped 32 percent in a single year -- as they did this year. Those kinds of uncertainties make it hard to stick to a game plan.
Eileen and Michael Sinopoli have come up with a strategy. They plan to save 75 percent of the cost of a public education, and have their children pay the rest. If the kids opt for a more expensive private college, well, anything goes.
The hard truth is that you have to put yourself first. I know, putting yourself first is the antithesis of being a parent, but hear me out. The mantra may be hard to accept, but it makes sense. No one will lend you money to pay for retirement, but borrowing opportunities abound for college.
Sending your child to a great college is not worth the price of an empty nest egg. You might have to rely on your children financially when you're older, something no parent wants to do.
Instead, max out contributions to your 401(k) or other employer-sponsored retirement plans, save in Individual Retirement Accounts (IRAs), build a cash emergency fund, and only then consider stashing extra cash for college.
College Funding Options
The hottest place to save for college is a 529 plan. Your contributions grow tax-free, and upon withdrawal for qualified college expenses, the money stays tax-free.
But if you don't have enough to save after funding your retirement accounts, start researching other options now.
- Scholarships: Your child doesn't have to score perfectly on the SAT or be valedictorian to qualify for a scholarship. Ask the college, but also check FastWeb.com, a scholarship information website that boasts more than 1.5 million scholarship listings worth more than $3 billion.
- College loans: Cooper suggests that parents arrange their financial affairs to maximize financial aid because the loan programs with the most favorable terms, such as deferral of interest and payments, are need-based. The Sinopolis have 529 accounts for both kids, but the couple is worried that overfunding the accounts will have a negative impact on financial aid. (Learn more about applying for financial aid at FAFSA -- Free Application for Federal Student Aid.)
- Loan option No. 2: Investigate Federal Parent PLUS Loans. If you don't want your child to take out loans, you can offer to pay them off if you're financially able. (Learn more about federal loans at Student Aid on the Web and financial aid programs in general at FinAid.)
- Work-study programs: Students can earn money for school and add to their resumes.
- Home equity borrowing: Your home is your home, not an ATM. "Borrowing on your home equity loans is one of the reasons people have been refinancing their homes well beyond what they would ever be worth,'' Cooper says. It's a last resort.
Leave Retirement Accounts for Retirement
If you're tempted to tap your retirement accounts for college tuition money, don't do it. 401(k) loans will only deplete your nest egg. "Taking money from that source will likely mean you'll have to work longer,'' says Cindy Conger, a certified financial planner and certified public accountant in Little Rock, Ark.
A calculated decision to work a few more years may help your funding strategies for both goals. You'll have more years of income, and that means more cash for tuition and more time to add to your retirement accounts.
Talk to Your Children
Have an honest conversation with your college-bound brood about what they expect, what you're willing to pay for and what you can afford.
If money is tight, consider a less expensive junior college for a few years followed by a transfer to a four-year school to concentrate on an area of study.
The Sinopolis haven't talked to their kids yet about their college wishes, but they know they want the kids to pay part of the cost.
"My kids attach more value to something when they have to pay part for it,'' says Eileen Sinopoli.