One common dilemma parents face is deciding what to do with their limited savings. While most parents want to help their kids get a college education, they also want to retire with financial security. In this face-off, Foolish contributor Dan Caplinger argues why your kids' education should come first.
Save for college!
Being a parent is tough. You constantly have to weigh your own needs against the needs of your kids. For instance, if you only have a limited amount of savings, which will you take of first: your own retirement or your kids' college education?
Obviously, the more you pay toward college costs, the less you'll have for your own golden years. Yet depending on your circumstances, a somewhat less extravagant retirement may be worth it if it gives your children a leg up as young adults.
Being a good parent
As parents, you're used to sacrificing for your kids. From birth, your kids are completely dependent on you for every need they have. As they grow, they begin to develop their own independence, yet they still rely on you for emotional and financial support. Even as sullen teenagers, they may shun your advice, but they'll happily come to you for money when they need it. And although you may feel uncomfortable about how much money you spend on your kids, you had to put their financial needs first, even above your own hopes and dreams for retirement and beyond.
It's only natural to keep sacrificing as your kids venture out into the world as young adults. For many parents, whether or not they still have a legal obligation to support their kids is totally irrelevant. As a college education becomes more of a necessity for young adults entering the workforce, it's almost irresponsible not to support your children's college efforts financially.
Using tax breaks
From a pure investing standpoint, accounts for college savings have advantages that most retirement accounts don't have. Both 529 plans and Coverdell ESAs allow you to invest your money without paying any tax on any of the income or gains your investments generate, as long as you use the money for education. Among retirement accounts, only Roth IRAs give you that advantage -- other retirement accounts are tax-deferred, but you'll owe Uncle Sam plenty when you use that money in retirement.
In addition, as the coming issue of Motley Fool Green Light discusses in more detail, many 529 plans offer additional tax breaks on your state income tax return. You may even be able to deduct your contributions from your state income tax, giving you even more of a payback for your college savings. So if you're looking for financial reasons to save for college, you won't have any trouble finding plenty of them.
Avoiding loan panic
Unfortunately, there's a much better reason to save for your children's education: Your kids really need your help. With costs at many private schools approaching $50,000 per year including tuition, room and board, and other associated fees and charges, many kids have to come up with a lot of money in order to go to the school of their choice. Although financial aid packages provide some support, it increasingly comes in the form of loans, which students obviously have to pay back at some point. According to one source, graduates now carry an average of almost $30,000 in student loan debt and expect to take 10 years or more to pay it off. In all likelihood, the trend toward higher loan debt will continue.
It's true that diverting your savings into a 529 plan, Coverdell ESA, or other account for your children's education will mean that much less in your own IRA or 401(k) plan. Yet the odds are good that you could end up with much more money than you'd ever need for your retirement. Meanwhile, your kids are much less able to deal with the consequences of cash shortages in their early adult years. All too often, huge amounts of debt force young adults into taking jobs based solely on financial considerations, leading to job dissatisfaction and burnout. Your children may well feel trapped in their jobs after graduation, as those jobs may be the only chance they have to dig themselves out of their debts.
No parent wants to see their children do things they don't want to do just for money. If someone asked you whether you'd give up a round of golf every week after you retire to ensure your kids would be happy, wouldn't you do it in a heartbeat? Saving for college for your kids is one way you can help to bring happiness to your children's lives.
For the other side of the argument, be sure to look at this article from Foolish contributor Tim Beyers.
In the latest issue of Motley Fool Green Light that goes live at 4 p.m. today, we bring you all the details on how to invest for college. To access the issue, along with all our back issues, our Money Answers archive, dedicated discussion boards, and advisor blogs, just click here for a 30-day free trial.