Should You Save for College or Retirement First?

Posted by Nick on July 30, 2012

My wife’s parents paid for the four years she spent in college leading to her bachelor’s degree. I paid my own way. We both went on to earn masters degrees, which we paid for ourselves. In the meantime, we had been saving for retirement, as well as college for our daughter. My wife is very adamant that we pay for her college, as this was done by her parents for her. Clearly we have differing opinions on this.

Should You Save for College or Retirement First?

So that brings up multiple options on the order of saving money:

  • Retirement First? Focus on retirement savings over college savings.
  • College First? Focus on college savings over retirement savings.
  • Save for Both Equally? Determine the best mix to save for retirement and college equally.
  • Retirement Only? Make the kid shell out for their own education.

Retirement First

Our first option is putting retirement savings over college savings. There are a few reasons why you might choose this option:

  • You have no children, and don’t plan to have any.
  • Your children are young, and you have time to grow a college fund for them.
  • Your children are nearing college age, and have received offers of partial or full scholarships or grants.

There are other reasons, such as already being excessively wealthy, and not needing to choose between college and retirement savings. Of course, if this were the case, there would be no reason for you to read this article, unless you simply enjoy reading anything you can whenever and wherever. I don’t like you in that case. Just so you know.

If you are going to save for retirement over college, you’ll need to look at your current savings structure, of course. Make sure you are saving at least as much as your employer is matching for 401(k) plans. My personal suggestion in this case would be to take what you have left for savings and split it between IRAs (Roth IRAs and Traditional IRAs) and a college fund (see next section for college savings options). Since you’ve already got a 401(k) set up, this puts retirement over college.

College First

Your little one’s education is more important to you than your retirement? Once again, there are various reasons this could be the case, such as having a defined pension plan, and getting close to retirement. So, how to split the savings? Here, my suggestion would basically be the opposite of the above; if you’re still saving in a 401(k) and/or IRAs, you can bring down the amount you’re putting into those. Then max out the college savings plan you are using.

Speaking of college savings plans, what’s available? If you haven’t heard about the 529 plan, definitely give it a look. They offer savings on taxes; there is no tax when you withdraw it for educational costs. These are federal tax savings, but most states give state income tax savings when you get the 529 offered by your state.

Other than the 529, you have the standard savings vehicles; IRAs, CDs, Grandma’s trust fund, etc… See a Comparison of College Savings Plans for overviews of the different plans available.

Save for Both Equally

Ah, a fair split down the middle. And a pretty simple process (as finances go) for savings options. Whatever you’ve got going into your retirement savings, put the same amount into a college savings account. Actually, you might want to put a little more in the college savings. Why? When it comes time for your college student to fill out the FAFSA, the government will look at your savings with less scrutiny than your child’s. This gives your child the ability to qualify for more grants.

Retirement Only

OK, so you don’t think junior’s cut out for college. You shouldn’t have dropped him on his head that one time! I’m kidding on both counts here, people. But it’s true, not everyone chooses to go to college after high school. If you and your child have talked about the military, a trade school, or following in the family business, then college may not be as important. Or, you just might not have the resources to help pay for college. Your child can still get student loans, scholarships and grants, and work while going to college.

There are plenty of articles here on retirement savings. I suggest reading those that focus on retirement, without considering other options, to see what options are available to you in this scenario.

The Final Answer?

Now, you already know what I’m going to say to start off here: The best answer is the one that you are most comfortable with, and works best with your own personal financial situation. Unfortunately, almost everything in personal finance comes down to this answer! But hopefully, you’ve gained a little more insight on how to make that personal decision with the information I’ve provided here.

My wife and I personally have decided to save for college, but not the entire amount; the kiddo’s gonna get a grant or a student loan. We want to help, but we want her to learn early on that life’s not a cakewalk. Since both my wife and I have a defined pension plan, retirement savings is a bit easier for us than for those that have only defined contribution plans as options. So, we have a little more leeway in the way of saving for college.

Are you saving for college or retirement first?

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Comments to Should You Save for College or Retirement First?

  1. My husband and I were in the reverse situation as yours – his parents saved up money for him for college and I paid my own way via a full-tuition scholarship and working. We’re putting away more for retirement than for college because the kids can get scholarships/loans and earn money to pay for college.


    • I would definitely agree in your situation, that’s the best way to go. It’s especially nice in my home state of South Carolina, where high school students who graduate with at least a 3.0 GPA get to go to an instate school for free.


  2. One thing not mentioned in this article about saving for college is the rapidly rising tuition increases. Tuition costs have been raising significantly over the years, and it can be hard to predict how much to save with this factor because it is unpredictable. Even if you decide you will get a student loan, those interest rates are also unpredictable. Congress almost let student loan debt interest rates double recently. Both the interest rates of student loan debt and tuition rates must be taken into consideration when making a plan to save for college.


    • That is a very unfortunate truth, Suzan. Tuition rates have increased at a much higher rate than inflation, making it harder for parents and students to pay for college. At this point, all any of us can do is save according to today’s standards, with an eye towards that fact.


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