The question of whether or not to save for college, how much to save, and whether or not kids should even go to college is one that is hotly debated. There are people who are firmly planted on one side or another, arguing passionately for their views. But there are many more people who are stuck in the middle, unsure of how much to save, or if they should save at all.
To Save…
There are lots of points to be made for starting a college savings account (usually called a 529). Many of these are laid out in Grayson Bell’s post on why he’s not fully funding his IRA so that he can fund his son’s college fund. His arguments cover the most common ones I hear when discussing the topic.
Given that adults with a college education outearn those without by over $1,000,000 in their lifetimes, it is certainly reasonable to want to help your child achieve that. Also, 529 accounts can be used on any education cost, so children who want to pursue a skilled trade can use the savings for that training as well.
Many on this side of the discussion also point to the staggering amounts of debt in this country. There are currently over $1 Trillion in student loan debt in the US. These loans can be a burden to students for decades, crippling them financially. Every dollar saved is one less dollar borrowed.
…Or Not to Save
On the flip side, there’s John Schmoll. In his post he explains why saving for his kids’ college education wasn’t a top priority for his family.
Instead, Schmoll’s financial priority is funding his retirement account. His argument is that there are loans and scholarships for college, but no such things for retirement. In other words, save for retirement now, or keep working later.
The other piece of this argument is the impact of financially strapped parents on adult children. While much has been made of this generation’s “boomerang” back their parents’ houses, there is also a rise in the number of parents moving in with adult children because they did not plan and save for retirement.
Which One is Right?
Well, that depends.
Interestingly enough, neither post advocates an all or nothing approaching to college saving. Bell isn’t fully funding his IRA, but he is fully funding his 401k, so he is saving for retirement and he does have a plan to replace those funds as his son grows.
Similarly, Schmoll and his wife are saving for their kids’ college education, but they put the majority of their savings into their retirement accounts.
There’s something else to consider, too. Currently only 8% of Americans have a 6-month safety net in their savings or investment accounts. In fact, the average American family would run out of savings after just 3 weeks of lost salary.
If you’re in this group, think about building up your emergency fund first – if you don’t ever need it you can still use it for college later!
How Do You Know What’s Right For You?
Everyone’s situation is different, so everyone’s answer to this question is going to be different. Our family leans more toward Schmoll’s idea of making retirement a priority over college. We put a small amount away for Miss O’s college fund, but we put more into our general savings and retirement accounts.
As you think about how to plan your own savings, consider these questions:
Do you have a 6-month emergency fund? If not, this should be your priority. Remember that you can always use your emergency fund to pay for college (if it’s big enough), but you can’t use a college fund to pay for an emergency without some pretty big penalties. Check out this post if you’re not sure how much you need for a 6-month emergency fund.
Are you funding your retirement? The average millenial will need approximately $1.6 million to retire comfortably. Yikes. What happens if you don’t have enough saved? Well, your golden years might be more like copper or tin years. You may have to lower your standard of living, move in with your kids, or become a burden on your children. If you’re not saving for retirement, you should start right now.
Are you in debt? Debt today is robbing you of financial freedom tomorrow. Every cent you’re paying in interest is money you’re not saving. It’s stealing from your emergency fund, your retirement, and your child’s college fund. You don’t need to be debt-free to save for college, but you do need a plan.
Is college important to you? In some families, college is non-negotiable. In others, not so much. If you have a family business maybe on-the-job experience is more important than a business degree. Then again, maybe a degree is required.
Is college important to your child? College isn’t the right path for every person. And though more and more jobs are requiring some college, it’s still not a must-have for everyone. And with college costs rising at an alarming rate, forcing a kid into college could be a very expensive mistake.
Of course, I’m not a financial expert, nor do I know your family. My point here is not to tell you what to do, but rather to spark a conversation. And also to let you know that whatever you choose, it’s okay.
