College Tuition vs Retirement Savings: What Should Take Priority?
This is a question that comes up frequently in my practice: should you prioritize paying for your child’s educational expenses or accelerating your retirement savings as you near the twilight of your career? If you are divorced, this decision is made all the more complicated by the presence of a co-parent who will also play a role in deciding how to fund your child’s education.
Who Should Bear the Burden of Student Debt?
College tuition is more expensive than ever, and it is not uncommon for students to graduate saddled with a student loan burden well into the six figures. While you don’t like the idea of your childbearing that financial burden, you also don’t want to use or compromise your retirement savings just to avoid disappointing your child or to silence your ex.
Has Your Financial Outlook Changed Since You Got Divorced?
Even if you and your co-parent worked this out in your divorce settlement – perhaps you both agreed to contribute to a 529 qualified tuition plan – your financial circumstances may have changed drastically in the years since the settlement was reached. Perhaps you thought you’d have some extra funds to contribute to your child’s education and are now considering dipping into your retirement savings to make up the gap.
“On average, a parent covering a child’s living expenses for five years and borrowing money for college tuition is missing out on $227,000 – almost a quarter of a million dollars – in retirement savings.” That was one of the key findings in a July 2020 Nerd Wallet study. While your child will have their entire career in front of them to pay off their student loans, you have a limited time to save for retirement. Can you really afford to leave that much on the table?
Parent Loans Should Be a Last Resort
Your child should take out as much money as possible in student loans before resorting to you and your co-parent taking out parent loans. Loans to students typically have lower interest rates, a longer pay-off period, and utilizing them will help parents avoid taking out more than they can afford to pay while still contributing to their retirement savings.
Take it from me: protecting your own financial interests does not indicate a lack of love – it sets a prudent financial example for your children. They will appreciate this when they get older, even if not immediately.