Mon, 21 Oct 2013
Parents shouldn't compromise their own retirement plans to save for their children's college expenses, but they should establish guidelines with their children for how much they're prepared to spend.
Christine Benz: We're talking about saving for college today, and one thing that a lot of families have to wrestle with is this idea of making trade-offs. They're usually saving for their own retirements, at the same time they're attempting to invest and save for college. How do you begin to evaluate those trade-offs and find that right balance?
Adam Zoll: I think in a sense, this speaks to some of the emotional issues that we talk about when we talk about saving for college. We all want to do the best that we can for our children and provide the best education that we can for them. However, doing so at the expense of saving for retirement could be a real mistake.
If you're not saving for retirement for a number of years, over the long haul, especially if you're in your sort of traditional college-savings years in your 30s and 40s, where your retirement is still maybe 20-30 years away from you, it may not be top-of-mind the way saving for college is.
However, by skimping on saving for retirement during those years, you could be doing yourself a real disservice and miss out on a lot more money when you do need it during your retirement. And of course, as we're fond of saying, your child can get loans to go to college, but no one is going to give you loans for your retirement.
Benz: And arguably an even worse phenomenon, one that I think a lot of families fall into, is that they end up raiding their retirement funds when those college bills come due. I'm assuming you don't think that's a great idea either?
Zoll: Right. I don't think it's a great idea. I recognize that in some cases that people don't have much choice. However, I think that if you really can't afford to repay yourself, which you're required to do when you take loans from things like your 401(k) account, then you really need to tread carefully. If you are in the position of having to borrow from your retirement fund, maybe you need to look at how much you're spending on the college education in the first place and ask yourself whether you're taking on more than you can afford.
Benz: If families run the numbers, and it looks like they will come up short when it comes to their own retirements and saving that full freight for college isn't going to be a possibility, what sorts of trade-offs should people evaluate?
Zoll: It could be anything from deciding that you cannot afford to send your child to a private school, so he will have to go to a public school. Maybe your child has his heart set on going to an out-of-state school that he's fallen in love with, or maybe he'll have to stay in state. We also hear of families, for example, sending their children to community college for a year or two and then the student transferring to a four-year school in order to get his degree.
These are all ways that people can provide what is most important, which is a college degree hopefully from a quality school without breaking the bank. And so, it's a balancing act. You have to make sure that you keep your perspective, not overspend on college, provide what you need to provide for your child, but, again, not compromise your family's financial health in the process.
Benz: You say that a big part of this is communicating with your child on an ongoing basis about what your expectations are and what you think you'll be able to do for them for college and what you may not be able to do?
Zoll: Right. In fact, many of our Morningstar readers, when we've asked them about this question, talk about the need to communicate with the child even at an early age when you're first having those conversations about the child going to college one day, why getting good grades is so important. Hand-in-hand, you can have the conversation about how college is very expensive. Maybe introduce the idea that the child will be expected to pay for at least part of college himself or if loans are likely to be in the picture. I think that it's a good idea to have the child have some sense of ownership in terms of this task that you're undertaking which is to get them a college education.
Benz: I know one thing we heard from some of our users was that they said they would pay for in-state tuition at the public university, but if the child had aspirations to do something else that it was up to the child to kind of meet that gap.
Zoll: You hear a lot of creative solutions that families come up with in terms of how to take on this task. And, again, I think that one of the key starting points is figuring out how much it's going to cost, or at least how much you think you can afford to pay. And then from there you can proceed to come up with some guidelines in terms of what kind of school you're willing to help your child attend.
Benz: Adam, thank you so much for being here and providing these tips.
Zoll: My pleasure.