Education Loans vs. Retirement Savings

April 10, 2014 - Laura
There’s an ongoing debate parents often face that has very little to do with political preferences — deciding whether to pay for a child’s college education and possibly taking a loan in order to do so, or saving that money toward retirement.
 
What does a student’s education cost? According  to a Washington Post article, the College Board “puts the average cost for 2011-2012, including tuition, fees, room, and board at $17,131 for four-year public colleges (a 6 percent increase over the previous year) and $38,589 for private, nonprofit institutions (a 4.4 percent increase over the previous year).”  To compound matters, an increasing number of students are graduating with high tuition debt with average tuition debt in 2011 at $23,000 (see the Dream Big article “Early Planning May Help Prevent Excessive College Debt).
 
How much do parents need to save for retirement? Experts generally say that a retiree will need 70 percent to 85 percent of their pre-retirement income in order to maintain a similar standard of living in retirement. Of course this varies per individual depending on their goals and circumstances, and some individuals may want (or need) to live on 100 percent of their pre-retirement income. Saving money in a tax-advantaged retirement plan such as a 401, 457, or IRA, can help supplement potential pensions and Social Security benefits.
 
What’s the potential downside of using retirement money for college expenses? There are several: 
  1. Money you put toward college expenses now could mean less money you will have in your non-working/retirement years, putting you at risk of becoming a burden to your child during your retirement.
  2. There are no grants, scholarships, or financial aid available for retirees.
  3. Borrowing from your retirement plan to pay for college expenses means you have to pay the money back to your retirement plan in a shorter amount of time (within 60 days if you’re laid off or leave the job) than the time allowed to pay back student loans.  Not to mention, you’ll be robbing your retirement assets of potential growth because it won’t be invested.
  4. There are penalties, such as income tax and a 10 percent early-withdrawal penalty for money withdrawn from 401 plans prior to age 59½. There are no penalties for withdrawals from a 457 plan, but you don’t necessarily want to deplete years of your retirement savings when your child has years ahead of them to pay down college costs.
Can parents do both? It may be possible for parents to save for retirement while helping their child with college costs. A parent’s chances of being able to do both can increase by planning and saving early (see this Huffington Post article for five ways to save). This Dream Big article on 529 plans has more information on strategies for college savings.
 
What are your thoughts on this dilemma? How are you tackling both education expenses and retirement savings? Share your ideas and strategies with us.

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