James BodeThis is the second of a two-part series on College Planning. To read the first segment, click here.
Planning for your child's college education is one of the most significant financial undertakings a family can face.
It’s not just about selecting the right school; it’s about striking a balance between supporting your child's future while safeguarding your own.
For many families, this journey begins with an overwhelming question: How do we prepare financially for college, especially while saving for retirement?
1. Should You Use Your Retirement Fund for College Tuition?
The desire to provide for our children often clashes with the need to prepare for our retirement. Some parents feel an obligation to fully fund their child's education, even if it means jeopardizing their financial future.
This emotional tug-of-war has led many to make questionable financial decisions, such as leveraging home equity, diverting cash flow intended for retirement, or even dipping into retirement savings to cover tuition costs.
Take the example of parents from the 1950s and ‘60s: Many refinanced their homes during real estate booms (at least here in New England) to pay for college. While this seemed like a practical solution at the time, it had long-term consequences.
Instead of entering retirement debt-free, many extended their working years or struggled financially during their golden years. The emotional satisfaction of paying for college came at the cost of their own financial security.
Your child has time on their side: they have their whole life to work, earn, and pay off loans if necessary. You, however, don't get a second chance to fund your retirement.
2. Should Parents Pay for College?
College decisions are deeply personal. Parents want to set their kids up for success and provide opportunities they themselves may not have had.
Some parents feel a strong obligation to pay for college entirely, while others take the stance that their children should shoulder the financial burden themselves.
Some parents cover the full cost of college; others contribute minimally or not at all. What works for one family may not work for another. The approach should align with a family’s financial reality, not family expectations, pressure, or even guilt.
For example, in my household, we’ve decided to share the responsibility with our kids. My wife and I plan to help our son prepare for and attend college, but we also want him to have some skin in the game. Our strategy is to use loans to cover tuition on an annual basis. After each successful year, we’ll pay off that portion of the loan. This approach incentivizes him to stay on track and value the investment we’re making in his education.
3. Is College the Right Path for Your Child?
A common frustration for parents is investing heavily in their child’s education, only for the child to drop out, transfer, or decide that college isn’t the right path.
Imagine paying $60,000 a year for a prestigious school, only to have your child leave after 18 months with no degree and no plan. Now, not only is your child’s future uncertain, but you’re also left footing a substantial bill.
To mitigate this risk, some parents — like us — attach conditions to financial support. If our child were to drop out, the responsibility of repaying any outstanding loans would shift to them. This ensures that our financial contribution is tied to their commitment and success.
4. Are You Prioritizing Prestige Over Practicality?
When it comes to funding college, there are so many options, but there are also opportunity costs (and real costs) to the decisions you make.
Financial aid packages, loans, and grants are typically calculated based on the parents’ financial situation, which means families need to have honest conversations about affordability.
In some cases, the emotional pull of wanting the "best" education for your child may lead to poor financial decisions.
Parents need to weigh the cost of a diploma from a prestigious university against the potential return on investment. For example, in the Boston area, schools like Babson, Bentley, and Bryant all offer excellent business programs, but the cost differences are staggering.
Is the higher price tag worth it, or can a more affordable option provide similar outcomes?
Having these discussions early can set realistic expectations for both parents and children. The goal should be to make a decision that aligns with the family’s financial capacity and long-term goals.
5. What Is the Best Way to Pay for College?
Obviously, the earlier you start saving for college, the better.
When a child is born, parents should think about setting up a will and planning for the future — college savings naturally become part of that thought process. With 18 years to save, the power of compounding can work in your favor.
In the old days (say in the time of our grandparents or even parents), saving vehicles like savings bonds were popular for long-term goals, including education. However, today’s parents have access to more sophisticated and flexible investment options.
Plans like 529 accounts are specifically designed for education savings, but they come with serious limitations. Funds in a 529 plan must be used for educational purposes, which can be problematic if the child decides not to attend college.
Flexibility is key when choosing a savings vehicle. While 529 plans are popular, they may not be the best option for every family. A financial planner can help you explore alternatives to 529 plans that allow for adjustments if circumstances change.
6. Should Children Pay for College?
Even if you can afford to pay for college outright, consider the lessons you’re teaching your child by doing so.
Fully funding their education might remove the financial burden, but it could also result in a sense of entitlement. On the other hand, asking them to contribute through loans or part-time work teaches valuable lessons about money, responsibility, and the value of their education.
When my wife and I got married, we were both debt-free thanks to the generosity of her parents. At the time, we didn’t fully appreciate what a gift that was. Today, as parents, we want to give our children a similar advantage, but we also recognize the importance of teaching them financial responsibility.
7. Are You Making These Mistakes to Pay for College?
One of the most common mistakes parents make is choosing the wrong savings vehicle or funding strategy.
For example, putting all your savings into a 529 plan can backfire if your child decides not to attend college. Similarly, relying on home equity to fund tuition can jeopardize your retirement or financial stability.
A better approach is to work with a financial planner to create a comprehensive plan. This includes considering your retirement goals, cash flow, and the potential costs of various college options.
By aligning your financial strategy with your long-term objectives, you can avoid the pitfalls that many parents fall into.
The Best Path For Your Child Is One That Prioritizes Your Financial Future
College planning is as much about discipline as it is about heart.
While it’s natural to want the best for your child, it’s crucial to prioritize your own financial stability. Retirement savings should come first, even if that means making tough decisions about college funding.
You may feel good about funding your child’s education today, but when you’re in retirement and (potentially) face a shortfall, how will it feel to have to ask that same child for financial support?
Our advice to all parents is to start early, save consistently, and communicate openly with your child about financial realities. Remember, your responsibility as a parent isn’t to shield them from every financial burden, but to prepare them for a successful and responsible future. By making thoughtful, informed decisions, you can support your child’s education without compromising your own financial well-being.
James Bode is Managing Partner at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business and life.
