One of the big mistakes I see with paying for college is parents diverting funds from retirement to pay for college. Why is this a problem? The short answer is that there are no loans for retirement.
The reason it is important to have a financial plan is to know how much you need to save for retirement in order to maintain the lifestyle you want. If you don’t meet those targets, you must either reduce your planned retirement spending (e.g. less travel, downsizing) or work for longer than planned. Once you are on track for retirement, you can put money towards college.
Why should college savings be second? There are a lot more options for paying for college than retirement. Plus, there are a lot of options to help keep the cost of college down.
The first is expectations. In a 2016 study, T. Rowe Price surveyed 1,086 families across the U.S. The report found that 62 percent of children expected their parents to cover the cost of "whatever college I want to go to." Well, I'd like to live in Jennifer Aniston's Malibu beach house but I don't think I can qualify for the mortgage.
We have set our students expectations incorrectly if they think that parents should pay for any college they get into. The difference in out-of-pocket costs for different schools can be upwards of $150,000-$200,000 if we pay retail.
In chapter 9 of Never Pay Retail for College, I talk about choosing “right fit” colleges. Choosing schools where our student will apply has the single biggest impact on the overall cost of college for our son or daughter. If we send our student to a school strictly on prestige or reputation, we will pay retail. If we take the time and do the work, we can spend less money and provide an education that better serves our child, while still having enough money to continue saving for our retirement.
We need to set the right expectations so that our children realize that we need to balance saving for retirement while paying for their college. If you have not done a financial plan, that is a great place to start. You need to know what you should be saving and what you can afford to pay for college.