You work hard to provide a nice life for your family, while also saving for your own future. But when it’s time for the kids to go off to college, you might be tempted to derail all of your carefully-laid plans. College tuition has climbed to record levels, with the average public university costing over $22,000 per year, and the average private university charging over $44,000 annually. For most people, simply whipping out the checkbook is not an option.
That dilemma has led many parents to the desperate conclusion of raiding their own retirement funds. But before you take such a drastic step, keep in mind what this decision could cost you. You won’t only lose the amount of money that you withdraw to pay the tuition bill. You could owe a penalty, and you might trigger higher income taxes, too. Most importantly, you will lose the interest that money would have gained from now until retirement. And you can make up for lost time.
We’ve seen well-meaning parents make this mistake, and then later they discover that they cannot afford to retire on time. Others go ahead and retire on schedule, sometimes out of necessity due to disability or illness, and then they are unable to afford the quality of life they once envisioned for retirement.
Luckily, you can easily avoid making this mistake. There are many ways to fund a college education, such as work study, public and private loans, and grants. Many scholarships go unclaimed each year because no one knows to apply for them, so keep your eyes open for opportunities. You might even qualify for more state or federal student aid than you imagined, particularly if you have more than one child attending school. Fill out a FAFSA (Free Application for Federal Student Aid) even if you don’t think you will qualify for any help. Parents are often surprised!
As with all dilemmas in life, prevention is the best cure. If you anticipate college expenses years in advance, you can establish a 529 savings plan to save tax-deferred dollars for your child’s education. Of course, it’s usually best to max out your own retirement savings first, since there are those other ways to pay for college.
The most important takeaway lesson here: There are other ways to pay for college, but only one way to pay for retirement. Fund retirement first, and don’t borrow from your future. Then, work with a college counselor to identify alternate ways to pay for your child’s college tuition.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.