Should parents save for retirement or for their child's college education?

Your children come first; that’s just the conditioned nature of being a parent. But what is the best way to save for your child's college education while saving for your own future? Learn how with these investment options.

Grandparent helping grandchild with work or homework.

Balancing college expenses and saving for retirement can be challenging. Remember, though, that you can get a loan for college, but you can’t get one for retirement. So, while children can turn to student loans, grants, scholarships, and part-time jobs to fund their education, parents are limited to their savings and investments to fund retirement. 

How to save for your child’s college education.

Unfortunately, most parents are only too willing to sacrifice their own retirement security for their children’s education. Many opt to tap into their retirement savings or delay retirement to cover college expenses. 

Parents should learn the various education fund savings vehicles. Your financial services professional can work with you to set a budget for what you can afford, after factoring in the necessary retirement savings. Here are some popular options for getting a head start on saving for college:

  1. 529 Accounts. This is by far the most widely used college savings option. Savings are tax-free for college, and there are no annual contribution, age, or income limits. Contributions to your in-state 529 plan may also qualify for a state tax deduction. There may be limits on the cumulative contribution of the 529 plan account. Also, there can be adverse tax consequences to using proceeds from the 529 plan* account for any purpose other than paying for qualified education expenses.

  2. Coverdell Education Savings Accounts. These accounts impose a $2,000 annual limit per beneficiary, but they allow you to self-direct your investments, as you would with an IRA. They also have the added benefit of offering tax-free treatment, not only for college but for elementary and secondary school as well. The tax-advantaged treatment of expenditures from a 529 plan, by contrast are directed at college expenses.

  3. UTMA and UGMA accounts. These accounts act as trusts for your child, allowing assets to be transferred to a minor when he or she reaches the age of majority. While they’re not specifically designed to provide for college financing, they are often used for this purpose. Please note that assets transferred to a child in a UTMA/UGMA account are irrevocable. Once the child reaches the age of majority, he or she will control how the money is spent.

  4. New York Life insurance policies. In case of the tragic death of a parent’s death, insurance benefits from a permanent life insurance policy can help pay for a child’s education. In the case of a whole life insurance policy, cash value within the policy can be accessed to help pay for education expenses.1
two children playing on the floor, while parent works.

Making college more affordable.

As noted earlier, the best way to accomplish the dual goals of paying for college and saving sufficiently for retirement is to work together. The earlier you invest in a college savings plan, the better. But there are all sorts of strategies for making college more affordable:

  • Have your child attend a community college for two years and live at home.
  • Have your child take AP classes in high school to complete a year or more of college in advance.
  • Suggest that your child participate in programs like AmeriCorps or Teach for America that help pay for college.
  • Attend a reasonably priced state school, and get a masters at a name school.

Why is saving for both retirement and college important? 

Although there are many ways to save and pay for college, the options for saving for retirement are not that plentiful. In fact, the following three examples highlight ways in which retirement savings are being eroded, which places those who choose their children’s education over their own retirement in a precarious position.

  • Shrinking pensions. Many state pension plans are significantly underfunded, with some in danger of being defunded altogether. Private pensions, particularly traditional defined benefit plans, have been steadily declining. Existing defined benefit plans are hampered by the low interest rate environment, which stunts earnings, and longer life expectancy, which increases liability. The only way to make up for these declining retirement assets is for individuals to save more. 

  • Rising tuition costs. This is likely the biggest challenge facing parents and students: Tuition has been rising faster than inflation for decades; the average cost of tuition and fees for the 2020–21 school year was $41,411 at private colleges, $11,171 for state residents at public colleges, and $26,809 for out-of-state students at state schools, according to data reported to U.S. News & World Report in an annual survey.2 

  • Raiding your retirement. Many parents, even those who were early, disciplined savers, have not been able to stave off the need to dip into their retirement savings, whether for educational expenses or to recover from economic reverses during the pandemic. However, dipping into retirement savings for whatever reason can yield the compounded negative effect of taxes owed on the withdrawal, a lower retirement balance, and the loss of interest on the withdrawn money.

Just know that your focus as parents is to prioritize your retirement savings. Because, without a substantial nest egg, you could become a burden on your children when you’re older. If your kids see you placing retirement first, it may teach them about the importance of saving for their own retirements. That could end up being the best payoff of all.

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Want to learn more about preparing for college funds?

A NYLIFE Securities financial services professional can help determine what’s right for you.

1Please note that accessing the policy’s cash value will reduce the policy’s death benefit and available cash surrender value. 

2Farran Powell and Emma Kerr, “What You Need to Know About College Tuition Costs,” U.S. News & World Report, September 20, 2020.

* 529 plans are offered through NYLIFE Securities LLC (member FINRA/SIPC), a Licensed Insurance Agency and a New York Life Company.