Saving for retirement and college can feel overwhelming for parents trying to find a balance. It’s crucial to prioritize effectively.
We spoke with Christine Roberts, a student lending expert, and Jason Friday, a certified financial planner, to explore actionable strategies for parents navigating these financial waters.
How can you effectively balance college and retirement savings?
One key piece of advice remains: retirement savings can’t be borrowed against. While it’s understandable that parents want to support their children, you must prioritize your own financial stability. Think of it like airplane safety instructions—secure your mask before assisting others.
“Many parents face this dilemma,” Roberts notes. Solutions exist through various lending options like Parent PLUS Loans or federal and private student loans. Remember, there are limited options for funding retirement, so focus on your own needs first.
Friday adds that using a Roth IRA for education expenses might be a viable option, as withdrawals for qualified education costs are tax-free. However, be aware that any IRA or 401(k) withdrawals could be considered income, potentially affecting financial aid eligibility.
What to know about contributing to 529 plans alongside retirement accounts?
Starting contributions early in both 529 plans and retirement accounts can significantly reduce the total amount needed for educational expenses. A 529 plan allows for post-tax contributions and tax-free growth for qualified expenses, while a 401(k) or IRA provides pre- or post-tax options.
It’s essential to consider how different accounts impact financial aid applications. A 401(k) or IRA is not counted in FAFSA assessments, while a parent-owned 529 is regarded as a parental asset. Moreover, withdrawals from a grandparent-owned 529 can affect financial aid calculations.
Friday suggests utilizing a parent-owned 529 plan early and saving a grandparent-owned 529 plan for later years due to the two-year income lookback for FAFSA.
When should you start discussing student loans?
As your child starts considering colleges, it’s time to have an open discussion about finances. Be transparent about what you can contribute to their education, enabling them to set realistic expectations for tuition and prioritize scholarships and grants.
Roberts recommends using resources like CollegeRaptor to estimate potential college costs based on your child's academic profile and financial situation. This tool can help you assess the gap between savings and expenses, serving as a foundation for the student loan process.
Keep in mind that many lenders, including some options for refinancing Parent PLUS Loans, can provide flexibility even while your child is still studying.
