M is for Money

The following is a guest post I originally wrote for Wide Open Wallet. Enjoy!

"You can get loans to pay for college but no one will lend you money for retirement"

Many parents struggle to balance saving for the future and providing for their children. Saving enough for retirement is difficult even without the added expense of kids and most people are woefully unprepared. But a college degree is the new high school diploma, a must to land a decent paying job. Any well meaning parent wants their kids to have the best possible start in life, a basic education. That leaves many parents with a difficult choice, should they take care of themselves or their children?

The opening quote is an often repeated piece of financial advice, advocating that parents should take care of retirement since there are alternative ways to pay for school. Many parents risk their own financial security so that their kids can have a better future. They put off saving for retirement so that little Susie or Johnny can attend the college of their choice. Since there is no substitute for retirement savings, they have instead jeopardized their own future.

Unfortunately there is a flaw with this advice, our system assumes that parents will help with college costs even if they do not. Most colleges use the Free Application for Federal Student Aid (FAFSA) to determine financial aid eligibility. This form collects information on the parent’s income and assets and is used determine the family’s share of the cost. The government and school will then help fill the gap with a combination of grants and loans.

Assets like retirement accounts and the family home are not included in the calculation, but any other savings and investments are expected to be used. Even if you have no assets, you will still be expected to contribute based on income. A family without assets, a taxable income of $60,000 per year, both parents working and two children would be expected to provide $4000 per year towards college. This is a simplified estimate based on the 2007-2008 guidelines. Assets or only one parent working would increase the amount that parents are expected to contribute.

If your family is expected to come up with $4000 per year for college and you don’t provide it, where will your child get that money? The college won’t reconsider aid because of a family’s unwillingness to help. From the FAFSA website – "Under Federal law your family is primarily responsible - to the extent they are able - for paying for your college expenses." Your child will have to take out additional loans, most likely private loans at a higher interest rate, to cover your portion as well. Currently those loans are hard to find, college aid is drying up. What happens then?

I don’t think that parents should put off saving for retirement to pay for college. The money in your retirement accounts won’t be considered when they calculate your child’s financial need. In fact, maximizing your retirement savings will shield more of your assets and make your child eligible for more aid. But unless your income is very low you will still be expected to cover some of your child’s college expenses. It’s important to know how much your family’s contribution will be based on your finances and be prepared to provide that amount. There are online calculators that will walk you through the steps and give you the current expected family contribution.

I know many parents count on their kid receiving scholarships to cover the gap, but this is poor financial planning. What happens if the expected scholarships don’t materialize? By planning ahead for college you can cover your share of the costs without jeopardizing your retirement or your child’s education. Huge student loans are a burden on young adults, I know most parents want to help as much as possible. While covering the entire cost of a college education may be unrealistic, parents can be prepared for their expected share.


Thanks for reading. If you enjoyed this post consider subscribing for updates.