Should You Prioritise Saving for Kid's College or Early Retirement?
Should you prioritise saving for early retirement or saving for your kid's college fund? In an ideal world, your answer would probably be both, but we know the world is not always as ideal as we would like. I suppose the possible answers could be:
Save for retirement as a first priority, or
Save for kid's college fund as a first priority, or
Have some sort of balance between the two,
Expect the kid to fund his or her own college.
Before looking at these, what did I do? I would say that I did option 1 - saved for retirement as a first priority. To be honest, I didn't really think too much about a college fund, my main focus was saving to achieve financial freedom, which turned out to be a great base to progress to being able to retire early. I only started to think about college funds as the kids got close to college age.
In fact, I didn't even know how much college would cost, which wasn't very smart, and I assumed I would just deal with the cost somehow when it came along. As it turned out, when the time for college came, I reallocated some of our savings and earmarked it for college. It meant that the savings that we had for early retirement reduced, but I hope that they should still be enough...something I'm trying to figure out during this first year of early retirement and blogging.
And how much does college cost anyway? According to Topuniversities.com, the total cost (tuition, accommodation and living costs) for a three year degree in the UK averages £66,000 ($81,433). In the USA, college courses tend to be four years, and the College Board estimates the average cost at a public college is £79,783 ($98,440) for in-state students and £129,314 ($159,560) for out-of-state students.
The amount paid for my daughter who finished university just a few weeks ago supports this. She studied in the UK, so it was a three year course, and our cost for tuition, accommodation and living allowance was £59,000 ($72,796) for the three years (tuition fees £27,000 ($33,314), accommodation £14,000 ($17,273) and living allowance £18,000 ($22,209)). There were also some other bits and pieces on top of this, especially travel cost in our case, which took us almost exactly to the £66,000 ($81,433) UK average.
It's worth checking to see whether there is any financial aid or grant that you might qualify for to reduce the cost. Unfortunately, we didn't qualify for any.
So, back to the question, should one prioritise saving for early retirement or saving for the kid's college fund? Looking at the options one at a time:
Save for retirement as a first priority
I don't think there is anything wrong with this. It doesn't mean that you love your children less and it doesn't necessarily mean that you don't help with the college funding as well, depending on your finances at the time. The kids might have to work their way through college, which maybe isn't a bad thing - it can be good for their résumé, help develop responsibility, give an insight into some industries and careers, perhaps open up opportunities for a job post graduation etc. They may have to take a student loan, but hopefully that can be offset by the higher wage that their degree should allow them to get. Lastly, I suspect that if you provide for your own retirement as a first priority, many kids would understand that and may even want it (although whether they realise it at the time or only later in life, I'm not so sure).
Save for your kid's college fund as a first priority
Parents want the best for their children, and so I suspect prioritizing saving for the college fund is a common choice. It's certainly great to give your kids a head-start, they can focus on their studies without having to work a job, and leave college with minimal or no debt. But on the other hand, they may miss out on some of the benefits of working during college years that I mentioned earlier, because if you are fully providing for the education and living costs, then there is no incentive for your kids to find a job.
Have a balance between retirement saving and kid's college fund saving
This is the one that I prefer (although not the one that I did!). Doing this, you give your kids a bit of a head start by contributing to the college expenses, but encourage them to grow their own responsibility to provide the balance of the costs that you are not funding. They can have the benefits from working that I mentioned earlier, without having to work so many hours which could have a negative affect on their studies.
Let the kid's fund their own college
No doubt there are many students out there funding their own studies. However, it will mean that they will have to work a job for quite a lot of hours, which could be detrimental to their studies, or they leave college with a large debt. Alternatively, they could delay starting college for a year or two and use that time to work and save money for college - maybe this isn't a bad idea as they will start college with a more rounded view of the world (having worked a full time job) and it may encourage them to ensure they make the most of their time at college.
With hindsight, would I change what I did if I could have a second chance? Recapping what I did...I started off saving for retirement as my first priority, but then ended up funding college, for our daughter Rebecca, in full. If I were to do it again, I would use a more balanced approach and fund a portion of the college costs with Rebecca having to fund the rest herself (perhaps we would fund around 50% or 60%). Because we financed her, Rebecca didn't have a part time job during university, but I think that it would have been a good thing if she had. It would have helped with her résumé, given her some experience of industries and jobs, and also helped her understand the value of money and the responsibility of having a job (luckily she's done OK at these things anyway, and has started her first job out of university a few weeks ago - well done Rebecca!). To save for our 50% or 60%, I would start saving early, even before having kids, so that it is a continuous habit of saving a small amount each month and, in that perfect world, still try to keep saving as much as possible for early retirement.
Perhaps a topic for another day, is it better to reduce the amount you provide for your kids college and use the balance of the cash to help them with a deposit for their first house? Maybe not a bad idea?
So, what do I do for my son, Sam, who is about to start university? As we funded Rebecca's studies, have we set a precedent meaning that it is only fair that we do the same for Sam, or do we adopt my do-over approach and look to fund 50%-60% and expect Sam to fund the balance by working a part-time job and maybe have a small student loan? If we were to do this, then I would reserve the extra money to give to Sam towards a house deposit if he wants to buy a house in the future. I'll have a chat with Sam about this over the next month or so and see what he thinks.