Should I be saving for my kids’ college education?
We all know that the cost of college is extremely high. And many parents of young kids are still struggling to pay off their own student loans. Wanting to protect your kids from having crippling student loans of their own makes a lot of sense.
However, for many families, particularly those with young kids, saving for future college costs can feel beyond feasible. So it’s normal to question if saving for college is something you need to prioritize immediately, if you can put it off for a while, or if you can forgo the pressure to do this all together.
Unfortunately, there isn’t a straightforward answer.
Understanding your current financial situation
Before deciding if you should (or can afford to) save for college, it’s important to get clear on your current financial standing. Saving for a future goal, like college, is fantastic, but if prioritizing that goal jeopardizes your own financial stability, you may want to focus on building a solid foundation for yourself first. Just like on an airplane, when you are instructed to put your own oxygen mask on first, before assisting others.
For example, if you start saving for college before building an emergency fund, you risk putting yourself in a bad financial situation. If, for example, you or your spouse lose a job and all of your savings are tied up in an account for your kids' future makes it harder to tap into if need be.
Or, when your radiator dies or your roof starts leaking, you’ll be forced to either take on debt to pay for those repairs (the interest on that will likely negate the advantages of the interest you are earning in a college savings account) or you may decide to dip into the college savings account to cover those costs.
While technically you can withdraw money from most college savings accounts to cover a non-college expense, there may be some penalty fees, depending on what type of account you have. Beyond the potential fees, as a parent, it feels awful to take money out of an account earmarked for your kids' future. Even if the money is technically still yours, once you’ve mentally allocated it to your kids' future, it can feel like you are stealing from your kid if you need to tap into it.
By building up an Emergency Fund first, you can then start saving for your kids’ future education costs, knowing that the money you set aside for them is money you can actually afford to dedicate to their future needs.
Is your retirement savings on track?
As a parent, it’s natural to want to put your kids wants and needs before your own. Of course, we are willing to sacrifice to ensure our kids have a better life. Because of this mindset, it’s not uncommon for parents to want to prioritize saving for college over saving for their own retirement.
If you manage to successfully spare your kids from student loans but in doing so you fail to save enough for your own retirement, you risk putting yourself in a dire position. It’s never a comfortable feeling seeing your aging parents struggle, but it’s exponentially complicated when you know the reason that your parents can't retire is because they paid for your college education. If you asked most adults if they’d rather make a monthly student loan payment, or send an equivalent amount to help support their aging parents, I think almost all would say they’d rather be paying for their education, than feeling obligated to support their aging parents.
It is important to point out that cultural differences may impact your perspective on prioritizing your child's education over your own retirement. In some cultures, it’s very common to put every resource available towards education, with the expectation that adult children will in turn financially support their aging parents. There isn’t a right or wrong way to approach this dynamic, but it’s important to recognize if your child’s education is coming at the cost of your own financial stability in retirement. If you go that route, as your child is approaching their college years, be sure to openly communicate with them about any expectations you have for them.
The benefit of starting early
If you are in a stable enough position to start saving/investing for your children’s education, the sooner you start the better.
There are a number of ways that you can save for your child’s future (High Yield Savings Account, UTMA, traditional brokerage account, 529 plan, or just stashing cash under the mattress). If your child is at least a few years away from starting college, you may want to consider an investment account, rather than just a savings account. While there is always risk when you are investing, the longer your investing timeline is, the better your odds of significant growth. Talking with a financial advisor can help ensure you pick a saving or investing strategy that fits your timeline and risk tolerance.
Compound Interest is a concept that essentially means that you earn interest on money that you contribute, but you also earn money on the interest that you’ve already accumulated. In the beginning, this doesn’t add up to much, but the longer you have the money invested, the faster it starts to grow.
For example, let’s say you just had a baby and decide to contribute $100 a month into an investment account until the child is 18. For the sake of calculations, we’ll assume you get an average return rate of 7%. By the kid’s 18th birthday, you will have contributed a total of $21,600 (this is called your principal), but the account will have grown to a total of $43,072.
Alternatively, let’s say you waited until your child was 9 to start investing but now you can afford to contribute $200 per month. In this scenario, you will have contributed the same amount, $21,600 (your principal), but the account will have only grown to $29,972.
Effects of compound interest on investing for college expenses
If you can afford it, starting as early as possible will make it much easier for you to hit your college savings goals.
It’s ok to start small
If you are eager to start saving for your children’s college education, but worried that you can’t contribute a meaningful amount, know that it’s ok to start small. That might mean setting up a recurring contribution of just $50 or $100 a month. Or that might mean dedicating a portion of your annual bonus or tax refund as a one-off contribution.
Even small contributions can really add up, especially if it’s over a long period of time (thank you, Compound Interest).
If you wait until you can afford a more meaningful contribution, it’s likely that you will put it off for longer than you intended. However, if you open a college savings account now, and start with a very small contribution, you are establishing the habit of saving for college. Once that habit is in place, it won’t take very much effort to increase your contributions over time.
You might, for example, start with a relatively small amount, like $50 a month, and then make a plan to increase the contribution by another $50 every time you or your partner gets a pay raise. Each little jump will be small enough that you won’t feel the impact, but after a few years, you will be contributing an impactful amount.
What if I can’t afford to save for college right now? Or ever?
While it would be wonderful to be able to tell your kids to select any college they want, and you’ll pick up the tab, that’s not the reality for most of us.
If you won’t be able to save as much as you’d like for your children’s college expenses, it's important to think about how you can support them in understanding the impact of the decisions they make around colleges
For many GenX and Millenials, there was a narrative that as long as you went to college, you’d be financially secure as an adult. Need to take out loans for college? No problem, your eventual degree will ensure you will earn enough that student loan payments won’t be a major issue. May students got loans that they didn’t understand. Often, their parents helped them to fill out the forms, and even the parents didn’t understand what they were prompting their kids to sign up for.
So, if you aren’t in a position to pay for your kids' college tuition in full (or at all), perhaps the biggest gift you can give them is to help them understand their options and the potential long-term impacts of their decisions.
Long before they start going on college campus tours, let them know that while you’ve been saving up to help them with the cost of college, you won’t be able to cover it in full. Help them understand what the impact of picking a private vs public college will mean, or in-state vs. out-of-state.
Plant the seed that if they get a job in high school, perhaps they should save a portion of their income for their future college costs. Help them find scholarships they can apply for. Help them evaluate the income potential that comes from different degrees. They may still choose to be a philosophy major at an out-of-state college, but at least they go into that decision with some level of understanding of the likely impact.
For many student loan borrowers, the total balance of their student loans was only a piece of the student loan frustration. It was also that they took out these loans without anyone ever explaining to them how student loans work, or the impact they will have on their future.
Instead of focusing on protecting your children from financial hardship, teach them how to navigate challenging financial decisions.
Summary
Yes, saving for your children’s future college costs is great, and the sooner you start the better.
However, if it feels unattainable right now (especially if you are currently paying for daycare) or if doing so would mean you sacrifice other, more important goals (like building an Emergency Fund or saving for your own retirement), you are not a bad parent for deciding to prioritize elsewhere.
If you would like support in building a stronger financial foundation, so you can get to a point where you are comfortably saving for college, working with a financial coach can help you reach those goals much faster.
