As many parents are readying for their children to apply to college this fall, this is a question that comes up frequently: 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. Perhaps you can well afford to pay for your child’s college education. If so that is wonderful and sending your child off into the world with a loan free college education can be a priority. However, if you cannot afford to do this, then remember the saying about the oxygen mask—put your oxygen mask on first before reaching out to help. If you need to save for retirement, then the best favor you can do for your child is to be honest with yourself and them. Put your oxygen mask on and save for retirement.
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. If you are now negotiating your financial divorce settlement and your children are young, you may be best off putting this part of the negotiation off until the issue is ripe meaning when your child is college age. That way, you will be more certain of your financial circumstances and won’t be over committing to something that could become a burden later.
“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 and realize that you haven’t put them in a position of having to support you because you over committed and over spent, even if not immediately.
Excerpted from an article previously published in Divorce Magazine.