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Kids and college–making the right choice

By Goldman Sachs Ayco Personal Financial Management

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.


Goldman Sachs Ayco Personal Financial Management

This material was prepared by The Ayco Company, L.P. d/b/a Goldman Sachs Ayco Personal Financial Management (“Ayco Personal Financial Management” or “Ayco”), an affiliate of United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”). This material was prepared for informational purposes only and should not be construed as personal financial planning, investment, tax, accounting, or legal advice. No investment decisions should be made using this data. GS PFM believes the material used for the article is accurate, but does not verify its accuracy independently and does not warrant or guarantee that is it accurate or complete. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. ©2021 The Ayco Company, L.P., d/b/a Goldman Sachs Ayco Personal Financial Management. All Rights Reserved. Brokerage services are offered through Goldman Sachs & Co. LLC and Mercer Allied Company, L.P. (a limited purpose broker-dealer), both affiliates of Ayco and members FINRA/SIPC.

Additional materials and revisions by © 2021 United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management. All Rights Reserved.

United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.

The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.

Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.

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