Kids and college–making the right choice

The struggle between funding your retirement and paying for your child’s college education is difficult. Preparing for the “Great College Chase,” you’ll want to be ready for the endless school choices, the emotions of sending your child off, and not least of all, the high cost.

There is often a gulf between the colleges your kids choose and your ability to pay for them.

And, as the private colleges continue to raise tuition, there is increased competition for acceptance in more-affordable state schools. Also, many parents in their 40s and 50s are simultaneously dealing with other financial goals such as the need to build a secure retirement.

Parents are often caught up in the following questions that guide the “Great College Chase:”

• Which funding priority should come first—retirement or a child’s education?
• How far should parents go in gratifying a child’s wish to go to a top-choice school?
• How much debt should they and/or their child incur, knowing the burden of repayment?
  

The answers aren’t so simple. Let’s look at an example.

Rob and Carey’s college funding journey

Rob is about to turn 55 and looks forward to retirement. But his son will be graduating from high school in June, and his daughter is only a year behind him.

Rob and his wife Carey understand the importance of balancing financial goals: prioritize and then compartmentalize. But they also understand it’s not strictly a numbers game: feelings can enter into the equation.

Pre-fund the college cost?

Rob and Carey have about $28,000 in a mutual fund. They also have 529 plan accounts for both kids. They funded them modestly each month through payroll deductions. If there was extra money, they generally chose to fund Roth IRAs, thinking they could always use that money later for retirement or college. (There are no federal tax penalties on IRA contributions or earnings used for qualified education expenses, like tuition, fees, books, and supplies.)

In total, they now have about $75,000 earmarked for eight years’ worth of college expenses for two children.

Choices and costs

According to The College Board, here are the total annual college costs (including room and board) for the 2017-2018 academic year:

• Four-year public (in-state): $25,300
• Four-year private: $50,900
• Ivy League: $71,800

If both of Rob’s children go to community college for two years at approximately $12,000 per year before choosing to finish their education in a state college, the $75,000 they saved will likely just be enough―for one student. If the kids each opt for a four-year state college, their individual educations would each cost around $100,000, or $200,000 in total. The $75,000 saved would fall short by $125,000.

But Rob and Carey’s kids are focusing on private schools, with state schools as safety options. They also want to live on campus and have the total college experience. The $75,000 will help, but could leave a shortfall of up to $325,000 depending on financial aid. And Rob’s retirement will be grossly underfunded.

Out of state―or hesitate?

Rob’s son wants to attend private school out of state, which rules out the idea of attending a state school ­at in-state prices. Potentially this could add a huge amount to the tuition and board. However, the school offered Rob’s son a generous merit scholarship and work-study opportunities that bring the overall cost down to the state college “ballpark.” The lesson here is to shop broadly, and look beyond the listed sticker price for financial incentives and opportunities offered by each school.

Additional funding strategies:

• Scholarships and grants from the federal or a state government, college or other private sources – review them carefully
• Loans – the government, commercial lenders or schools may provide you or your student with loans, which drive down today’s costs, but add a debt burden to be paid in the future
• Make sure to closely compare award letters from prospective colleges, and understand all the features of available loans, especially eligibility, interest rates and repayment terms

It can be challenging to meet 100% of college financial need through savings. It is important to understand what you can save, what you feel comfortable borrowing, and to make choices today that you and your children can live with tomorrow.

Want to learn more? Check out other articles from AYCO on financial planning and more.