MONEY college saving

Saving for College vs. Saving for Retirement: Why the Conventional Wisdom Is Wrong

Princeton campus college
Barry Winiker—Getty Images

In this special guest column, a college expert challenges some familiar financial advice for parents.

Financial advisers often tell parents that they should save for their own retirement first and their children’s college educations second. They support this advice with simplistic sound bites such as “You can borrow for college, but you can’t borrow for retirement.”

But I’ve done the math, and the experts are overstating the case. You end up with much more money in retirement if you set aside money for retirement and college when your kids are young than if you just put all your savings into retirement accounts.

Here’s why the experts are wrong:

First of all, you can borrow for retirement—through a reverse mortgage, although those have their downsides.

Secondly, just because you can borrow for your kids’ college (through federal Parent PLUS or private parent loans, for example) doesn’t mean you should. The interest rates on parent loans typically exceed what you’re likely to earn on savings, so paying for college out of savings is more financially advantageous to you in the long run.

Check out MONEY’s 2015-16 Best Colleges rankings

Here’s the savings strategy that results in the highest total retirement savings:

  1. Maximize the employer match on contributions to retirement plans, since that is free money.
  2. Build an emergency fund with at least three (but preferably six) months’ living expenses.
  3. Pay down all high-interest debts, such as credit cards.
  4. Save for the child’s college education in a 529 savings plan. If you can manage it, aim for saving enough to cover at least one-third of future college costs. For a child born this year, that means saving $250 a month from birth for future enrollment in a public four-year college.
  5. Save the rest in retirement plans. Again, if you can manage it, a good rule of thumb is to save a fifth of your income during your working career to pay for the last fifth of your life, in retirement.

Here’s why this strategy pays off in the long run. Consider two scenarios in which parents save $1,000 per month for 40 years in tax-advantaged accounts. Assume an average annual net return on investment of 4.9% on college and retirement savings and an interest rate of 7.9% on the parent education loans.

  1. In the first scenario, the parents save $250 per month for college in a 529 savings plan for the first 17 years for college, and the rest for retirement.
  2. In the second scenario, the parents save the full $1,000 for retirement for all 40 years and plan on borrowing the amount they would otherwise have saved for college. However, the loan payments will be deducted from the amount the parents would have saved for retirement, for a total of 10 years starting six months after the student graduates from college.

The first scenario yields $79,690 in college savings at the end of the 17-year period. Assuming that the parents use about a quarter of the money each year the student is in school and that the remaining college savings balance continues to earn a return while the student is in school, this covers a total of $86,234 in college costs. At the end of the 40-year period, the parents have saved $1,247,469 for retirement.

In the second scenario, the parents also spend a total of $86,234 to pay for college, but they borrow the money instead of saving it. With monthly interest capitalization during the in-school and six-month grace period, this grows by 23% to $106,283 by the end of the grace period. Over the 10-year repayment term, the parents make a total of $154,067 in loan payments. At the end of the 40-year period, they have $1,187,422 for retirement. That’s $60,047 less than the retirement savings in the first scenario.

Source: Mark Kantrowitz

*This number reflects the years that the Scenario #2 parents were unable to contribute their full $1,000 a month toward retirement because they were making loan payments ($480,000 – $154,067 = $325,933).

The only time borrowing for college costs is financially beneficial is when the interest rates on parent loans are lower than the equivalent long-term earnings rate on your investments. But that just doesn’t happen very often. True, private lenders are advertising parent loans starting at about 2%, but those are variable rates that are likely to rise over the years.

In early July of 2015, some lenders were offering parents fixed rates as low as 5.1%, but according to Morningstar, the average 529 investor has been earning total returns of only about 4% , even during the recent bull market, in part because funds for older students are parked in safe, but very low-yielding, bonds. And while retirement savers have been earning higher returns—typically about 10% a year over the last five years, according to Vanguard—those returns are not guaranteed in the future, and can vary dramatically depending on your timing. During any 17-year period, the S&P 500 is likely to drop by at least 10% at least twice.

So the next time a financial expert compares airplane safety briefings (where the flight attendant tells parents who are sitting next to a child to put their own oxygen masks on first) with whether to save for college or retirement, remember that the flight attendant isn’t paying for your child’s college education.

Read next: Find Out How the Common App Has Changed This Year

Mark Kantrowitz is senior vice president and publisher of He writes extensively about financial aid, scholarships, and student loans.

For more advice on paying for college and our latest college rankings, check out the new MONEY College Planner.

MONEY Retirement

Don’t Save for College If It Means Wrecking Your Retirement

Mark Poprocki—Mark Poprocki

When you short-change retirement savings to pay for the kids' college, they may end up paying way more than the price of tuition to support you in later life.

Making personal sacrifices for the good of your children is Parenting 101. But there are limits, and financial advisers roundly agree that your retirement security should not be on the table.

Still, parents short-change their retirement plans all the time, often to set aside money for Junior to go college. More than half of parents agree that this is a worthwhile trade-off, according to a T. Rowe Price survey last year. Digging into the reasons, the fund company followed up with new results this month. In part, researchers found:

  • Depleting savings is a habit. Parents say it is no big deal to steal from retirement savings. Some 58% have dipped into a retirement account at least once—most often to pay down debt, pay day-to-day living expenses, or tide the family over during a period of underemployment.
  • Many plan to work forever. About half of parents say they are destined to work as long as they are physically able—so why bother saving? Among those who plan to retire, about half say they would be willing to delay their plans or get a part-time job in order to pay for college for their kids.
  • Student debt scares them. More than half of parents say spending retirement money is preferable to their kids graduating with student debt and starting life in a hole. They speak from experience. Just under half of parents say they left college with student debt and it has hurt their finances.

We love our kids, and the past seven years have been especially tough on young adults trying to launch. So we shield them from some of life’s financial horrors, indulging them when they ask for support or boomerang home—to the point that we have created a whole new life phase called emerging adulthood.

Yet you may not be doing the kids any favors when you rob from your future self to keep them from piling up student loans today. Paying for college when you should be paying for your retirement increases the likelihood that they will end up paying for you in old age, and that is no bargain. They may have to sacrifice career opportunities or income in order to be near you. You’ll go into assisted living before you become a burden on the kids? Fine. At $77,380 per person per year for long-term care, it could take a lot more resources than the cost of borrowing for tuition.

It sounds cold to put yourself first. But the reality is that your kids can borrow to go to school; you cannot borrow to retire. So get rid of the guilt. Some 63% of parents feel guilty that they cannot fully pay for college and 58% feel like a failure, T. Rowe Price found. Nonsense. Paying for college for the kids is great if it does not derail your savings plan. But if it does that burden must become theirs. That’s Parenting 101, rightly understood.

Read next: Don’t Be Too Generous With College Money: One Financial Adviser’s Story

MONEY College

How Families Are Keeping a Lid on College Costs

Even though the price of a degree is steep, a new report finds that Americans are coming up with ways to limit the damage.

Despite the rising sticker price for a college education, American families are keeping higher education spending in check, according to Sallie Mae’s annual study of how students and their parents pay for college. One key reason: families are working hard to keep costs down.

This past academic year, families devoted an average of $20,882 toward a college degree, about the same amount they’ve paid for the past three years, and well below the 2010 high of $24,097.

“Even though we read stories about tuition going up, families are really holding the line on how much they’re spending,” says Sallie Mae’s Sarah Ducich, co-author of How America Pays for College. “They’re just not willing to write a blank check, and they are taking determined steps to make college affordable for them.”

They also relied less on debt. Borrowed funds covered an average of 22% of college costs this year, down from 27% the previous two years and the lowest level in five years. One of the main reasons for that, says Ducich, is that more students, especially low-income ones, were awarded grants and scholarships.

Overall, families are employing a number of cost-cutting measures, with the average family taking five different steps to bring expenses down, the report found. Among the biggest ways to trim education budgets:
  • Enrolling in two-year schools: In 2014 34% of students were enrolled in two-year public colleges, vs. 30% last year. That let them spend $10,060 less than four-year public school students did on average, and $23,843 less on average than their peers at four-year private schools.
  • Shopping by price: Two thirds of families reported eliminating colleges because of high costs. “This cost curve is something we saw jump post-recession, and it’s stayed at this high since,” Ducich says. Another 12% transferred to a less expensive school, up from 9% who did so last year. (For help finding a good education at the right price, check out our new ranking of the best college values.)
  • Changing majors: One in five families admitted to swapping majors to pursue a field that is more marketable, a trend that’s been steadily rising since 2012.
  • Lowering “fun” spending: Two-thirds of students said they cut personal spending to help shoulder college costs, vs. 60% who said the same last year.
  • Staying local: A full 69% of students opted for in-state tuition to save, and more than half chose to live at home or with relatives to cut down on housing bills.

More on how to save on college:



Tips on winning a scholarship

Three award winners and two grant experts offer advice for improving the chances of nabbing more tuition help.

  • Reuse your admission essay

    Ben Kaplan, Harvard graduate, author of How to Go to College Almost for Free, and founder of
    Winner of $90,000 worth of private scholarships

    His advice: Make the scholarship process part of the college application process, since college admission essays can be reused for scholarship applications. It is a learning opportunity. You are learning how to present and promote yourself. That’s worthwhile.

    Check out the websites and counselors of the high schools near you for scholarships that aren’t nationally publicized, and so are likely to have less competition. I did that, and ended up winning several scholarships that no one else at my high school knew about.

    I don’t usually recommend entering sweepstakes scholarships with random drawings. Those are all about acquiring your name for marketing purposes.

  • Build a short list

    Grant Means, sophomore, Stanford University
    2012 Coca-Cola Scholar

    His advice: Don’t waste your energy applying for scholarships that aren’t good fits. Make sure the scholarship you are applying for aligns with your passion in a deep way. Once you have a short list, go after those programs with everything you’ve got.

    Almost all scholarship applications have word or character limits, which means you have to justify every phrase. Be picky and maximize the impact of what you say. Give them something they won’t see 1,000 times. Be creative. Be different.

    Related: Here’s How Many Students Could Save $50,000 on College—But Aren’t

    You should build two résumés. On one put down and describe everything that could possibly be important. The other should be a one-pager with the accomplishments you are most proud of. You can use these as building blocks for the applications.

  • Volunteer — it pays off

    Brian Liang, freshman, University of Connecticut’s combined BS/MD program
    Winner of two private scholarships totaling $1,100

    His advice: I applied to about five private scholarships, some national, and some local. I spent one-and-a-half to two hours on each application. I got two locally based scholarships.

    I picked the ones I knew I had a good chance of getting. It also pays to give your résumé to your high school counselors. They usually have some scholarships that they know about and vote on. I have friends who got scholarships that way.

    Most high school students do some community service, and there are a lot of community-based scholarships. So volunteering does pay off in the end.

  • Speak to your high school counselor

    Diana Adamson, executive director, ScholarMatch, a website that crowdsources scholarship funds for students in the San Francisco Bay Area

    Her advice: Donors want to see students who have overcome some sort of obstacle, are committed to their education, and want to give back. They tend to support those who can tell their stories and maintain a positive attitude.

    The best thing sophomores or juniors can do is to get an appointment with their high school counselor. They need to look at their transcript and arrange their classes so that they can meet the requirements for the most generous colleges and scholarship programs. The goal is to have options.

    Seniors should fill out the FAFSA, since schools and scholarship programs use it to determine financial need.

  • Answer each question fully

    Oscar Sweeten-Lopez, team leader, Dell Scholars Program, which provides low-income, at-risk students $20,000 apiece, plus other support, toward their college education

    His advice: Twelve thousand students start applications, 8,000 finish, and we can select only 300 to win. The main problems we see are a lack of effort on the essay questions and waiting until the last minute.

    You have to take the time and effort to really read the questions and answer them fully. If you come across as open and honest, you will do better.

    One of the questions we ask is about goals. That is a fairly common question by colleges and other scholarship programs. So you should have a response prepared that you can customize for each application. But make sure you don’t just copy and paste.


5 top-rated 529 Plans

If you won’t get a significant tax benefit — or any benefit at all — from investing in your own state’s 529, it pays to shop nationally for a low-cost, high-performance 529.

Here are five plans, in alphabetical order, that get high marks from both Morningstar and

Alaska | T. Rowe Price College Savings Plan. T. Rowe Price manages this comparatively low-cost fund that gets five stars and a nod for its solid investments from Morningstar. Plus, thanks to one unusual perk, you’re eligible for in-state tuition prices at the University of Alaska up to the amount you have in the 529.

Nevada | 529 College Savings Plan. gives this Vanguard-managed plan its top 5-cap rating.

Several of its investment options get a 5-star rating from Morningstar, like the Total Stock Market Index fund, the biggest and cheapest passive investment option around.

New York | New York’s 529 College Savings Program. This 529 gets top ratings from both Morningstar and

The program is jointly run by Vanguard and Upromise, which makes it easy for parents (and other relatives) to have shopping rebates credited to a college savings account.

Related: What’s the best 529 savings plan for you?

Utah | Utah Educational Savings Plan. gives Utah its highest 5-cap rating, and Morningstar gives top 5-star ratings to Utah’s age-based options.

Utah’s Vanguard-run funds have some of the lowest costs in the business. Utah also offers an FDIC-insured option for absolute safety.

Virginia | CollegeAmerica. It’s cheaper to invest directly in low-cost plans like Alaska’s, Nevada’s and Utah’s, which don’t charge commissions and have much lower expense ratios. But if you want to use a broker or adviser, this is one of the better choices. gives this program, which is run by American Funds, 4.5 caps for out-of-staters. And Morningstar gives several of its investment options its top 5-star rating.



What is the best 529 savings plan for you?

529s are just like other investments; research has shown that low-cost index funds generally end up providing higher returns to investors than funds that spend money on managers who try to pick and choose among stocks.

Opting for passive fund 529s can save as much as 0.85% in expenses, says founder Joe Hurley.

But which of the many low-cost funds should you choose?

It depends on your state. If you live in one of the three states — Indiana, Utah, or Vermont — that offers tax credits, it pays to stay in state. You can get significant rebates on your 529 investments.

For instance, an Indiana couple who earns $100,000 and invests $5,000 in one of their state’s 529 plans, would save $1,040 on their state taxes, according to Morningstar.

Another 27 states allow residents who invest in their home state’s 529 to deduct at least some of their contributions.

Check this Morningstar report to see whether sticking with one of your state’s plans offers significant tax benefits. For instance, an Iowa couple earning $100,000 who contributes $5,000 a year to their state’s 529 would get a reduction in their state tax bill of $449. But South Dakota residents would do well to shop for an out-of-state 529; the same couple would only get $40 back on their taxes.

Also check to see if your state’s plan has gotten poor ratings, like some of South Dakota’s 529 investment options have from Morningstar.

An additional five states — Arizona, Kansas, Maine, Missouri, and Pennsylvania — offer tax parity, which means residents get tax breaks for investing in any college savings plan in the nation.

See what kind of college savings tax breaks your state offers its residents:


What’s the best way for you to save for college?

To help you choose the best college savings option, here’s how each plan stacks up in the categories that matter most.


Maximum contribution:

Annual: Typically, none. But if you contribute more than $14,000 in any given year, you’ll trigger gift taxes.

Lifetime: As much as $300,000 in many plans.

Tax treatment:

Federal: Tax-deferred growth, tax-free withdrawals for college expenses.

State: Many states provide tax benefits to residents using their plan.

Financial aid impact: Maximum of 5.64% of value will count against you.

Restrictions on withdrawal and spending: Withdrawals must cover qualified higher education expenses.

Potential problems: Limited investment options. Some states funds have comparatively high expense ratios.


Maximum contribution:

Annual: Typically, none. But if you contribute more than $14,000 in any given year, you’ll trigger gift taxes.

Lifetime: Up to $220,000 in some plans.

Tax treatment:

Federal: Tax-deferred growth, tax-free withdrawals for tuition.

State: Many states provide tax benefits to residents using their plan.

Financial aid impact: Maximum of 5.64% of value will count against you.

Restrictions on withdrawal and spending: Withdrawals only cover tuition.

Potential problems: Someplans are facing financial difficulties and may not have the funds to meet their obligations.

Most prepaid tuition plans require either owner or beneficiary of plan to be a state resident.


Maximum contribution: None.

Tax treatment:

Federal: Tax-free access to the cash value of your policy.

Financial aid impact: These assets are not counted against you in financial aid.

Restrictions on withdrawal and spending: None.

Potential problems: High fees; lose money if withdrawals are made within the first few years.


Maximum contribution:

Annual: $5,500.

Lifetime: Depends on income.

Tax treatment:

Federal: Tax-deferred growth, and tax-free withdrawal of contributions if used for college. Earnings can be withdrawn tax-free after you turn 59 1/2.

Financial aid impact: These assets are not counted against you in financial aid.

Restrictions on withdrawal and spending: None (10% early withdrawal penalty waived for qualified higher education expenses).

Potential problems: Earnings are subject to income tax and withdrawals can impact future financial aid eligibility.

NEXT: What’s the best 529 savings plan for you

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