For many parents, saving for college begins in the first few months after a new baby arrives, giving them plenty of time to build up savings necessary to pay for their child’s college tuition. For some families this may be a good option, but for others, as surprising as it might sound, saving for college isn’t the best use of their income and available funds.
It may seem like it spits in the face of common sense to advise parents not to save for college, but that’s just what many financial experts say may be the best choice for certain families. We’re not suggesting that no one should ever save for college, but it is smart to figure out whether or not college savings is the best way to help you and your children have a secure financial future. Read on to gain some insights into why you might want to hold off on saving for college; the reasons might surprise you.
- Saving for college isn’t ideal for everyone: If you’re on a tight income, living from paycheck to paycheck, or are out of work, saving for college shouldn’t be at the top of the list when it comes to allocating your funds each month. There are likely other areas where you could use that money much more effectively, and may even help to set you up so that you’re better able to help your kids pay for college later on down the road. This can mean setting up an emergency account, concentrating on your own savings, buying life insurance, or even paying off what’s left of your own debts from college. If you’re struggling to even make ends meet, hold off on even contemplating saving for college until you are in a more stable financial situation.
- You have lots of high-interest debt: While having small debts or a home mortgage shouldn’t necessarily dissuade you from saving for college, carrying lots of credit card debt or other very high-interest debts definitely should. You’d be hard pressed to find a college savings plan (because there isn’t one) that would give you a return that’s anywhere near the interest you will pay on that credit card debt. Simple math tells you that you’re much better off taking care of those debts before starting to put money away for college. Plus, you’ll have saved hundreds or possibly thousands in interest that you can now put toward college.
- Saving for retirement may be more important: As a parent you want to make sure that your kids are well taken care of, but in order to be able to do that, you have to take care of yourself first. If you have little set aside for retirement, most financial planners will tell you that starting to save for your own financial future is a much more pressing financial issue than starting a college fund. Why? Because to be able to retire you have to have money in your accounts and you cannot borrow it like you can for college. Some parents may be able to swing saving adequately for both, but if you have to choose one or the other, the smarter decision is to concentrate on retirement.
- The economy simply may not permit it: Times are tough for many people around the country and many are out of work, struggling to make ends meet because of underemployment, or just nervous about their future prospects. Others saw huge losses in their retirement savings and investments that could set them back years. All of these factors may contribute to making it unwise for families to put too much, or anything at all, into a college savings account. Mortgage payments, emergency funds, and retirement funds may be far more pressing issues, without which many families may have a bleak financial future. Meeting with a financial planner can help families to determine how best to allocate what assets they have and potentially get themselves to a place where they might be secure enough to start putting away a small amount each month for college.
- You don’t have enough backup cash: The majority of Americans don’t have enough money in reserve to cover an unexpected expense of only $1,000, which could be disastrous if major medical expenses come up or a working parent loses his or her job. Before you even consider saving for college, you need to build up a substantial cash cushion that would let you cover three to six months of living expenses at the minimum, though many experts advise a solid six to nine ideally. Otherwise, unexpected expenses might end up on a credit card, where they’ll rack up interest and put you even farther away from your financial goals.
- You haven’t researched how financial aid formulas will impact your family: Financial aid formulas are complicated, to say the least. Take a look at a wide range of factors when determining how much aid your child will qualify for and how much you’ll be expected to pay out-of-pocket for college expenses. In many cases, it will make more sense to contribute larger sums to retirement funds early on and then later concentrate on saving more for college as children age to better take advantage of the tax calculations done on financial aid. Your best bet is to talk to a financial planner who is familiar with financial aid. He or she can help you lay out a savings plan that will help make the most of federal aid and your monthly income.
- You don’t have life insurance: Should anything ever happen to you, either death or disability, would your family be able to stay afloat? If you’re not sure, then you may need to look into getting a life insurance policy before you consider saving for college. Investing in a life insurance policy gives your family some added security should you no longer be able to provide for your family’s daily needs. Like retirement plans, life insurance provides money that cannot be borrowed or loaned for elsewhere, which, again, is something that is easily done for college expenses. There are even some life insurance plans out there that let you withdraw money that can be used for college expenses, so look into it before making any financial plans.
- Money can be removed from retirement accounts if kids are floundering: Worried about putting so much into a retirement account without saving much for college? Don’t be. If worst comes to worst and your kids need some help managing their college debt, you can always take money out of retirement accounts to help with their expenses. Most 401(k) and IRA plans will allow for individuals to borrow a large portion of their savings, though it’s important to remember that there are strings attached: 401(k) plans will require you to pay back the money with interest and IRAs will charge you a penalty for early withdrawal. While this obviously isn’t ideal, it can be a safety net for parents who are worried they won’t have cash on hand to help kids who simply can’t repay loans or who are having financial trouble.
- You don’t want to be a burden on your kids later on: Paying for your kids’ college educations is a great gift, but it could have some consequences for both you and your children later on if you don’t have enough squirreled away for retirement. Your children might end up having to help you with expenses, pay for medical care, or you may even have to move in with them just to make ends meet. While this is great if it’s a choice your kids are making, it’s a lot less desirable if it’s the result of having little other choice because you didn’t have enough set aside for retirement.
- Paying for your kids’ college is nice, but not a requirement: While many parents want to be able to pay for their kids’ college education, the reality is that you don’t have to pay for college, and most parents don’t end up footing the entire bill out of their own pockets. Parents shouldn’t feel guilty for not starting a college fund, especially if the money could be better used in other ways. Many feel that asking kids to pay for their own college gives them a sense of ownership over their education, can motivate them to work harder, and builds a work ethic that kids getting a free ride from their parents might not have. While it’s up to you to decide whether saving is the right decision, many people who have paid for their own education have gone on to do great things.