If you are like most 50+ parents, you have not yet set aside enough money to pay for both your children's college education and retirement. So what should you do with your current disposable income? Sock money away for retirement or set aside funds to pay for Junior's college education?

Here is some advice to help you decide.

Retirement should come first

Financial planners agree hands down: Although it's admirable to want to pay for your child's college education, you should make retirement your priority. Why? "The tongue-in-cheek response we usually give is that the government, historically, has been willing to loan your children money to get an education,'' says Richard C. Salmen, a certified financial planner with GTrust in Overland Park, Kansas. "But up to this point, the government has not been willing to loan you money to retire."

Putting money into a company or government retirement plan, such as a 401(k) or 403(b), is also more advantageous from a tax perspective, says Salmen. Your can deduct the amount you save from that year's income. The deduction is almost always more valuable than the state tax deduction for contributing money to a 529 college savings plan -- if your state even allows the deduction.

If you have enough money to save for both retirement and college, then a 529 Plan is the way to go, financial advisors agree. But if you choose to save your limited discretionary cash for college instead of retirement, then you may need to delay your retirement age. Or work part-time after leaving your career. Or give up your dream of owning a vacation home and significantly cut back your retirement budget.

Fortunately, there is a way to satisfy everyone's needs.

Consider public institutions

The average cost for a four-year private college or university was $22,218 a year for the 2006-2007 academic year, according to The College Board. A four-year public institution cost only $5,836.

When it comes to education, the price tag isn't necessarily an indication of the value your child will receive. So if you need to save your money for retirement, consider steering your child away from expensive private schools and toward a state university or college, or a community or two-year college.

State universities. If your child can get into a competitive state school, then you'll get a big financial break. State schools charge lower tuition to in-state students. "The cost of the seat an out-of-state student pays is many times more expensive than the in-state student pays in the very same classroom,'' says Bonnie Hughes, a certified financial planner with A & H Financial Planning and Education in Kennesaw, Georgia.

Community colleges. Some students can thrive at a strong community college, where they will be given a chance to mature and learn the ropes without racking up enormous debt to cover tuition costs. In particular, community college is an excellent choice for students who are ambivalent about college. "The first year of college is the most critical one,'' Salmen says. "Way too many parents spend a significant amount of money to send their child off to their freshman year of college only to have that student come home at the end of the first year with very few academic credits to show for the money spent.''

If your child proves to be serious about his studies, many community colleges have agreements with four-year schools that guarantee a student admission if he meets certain grade and program standards, explains Philip Johnson, a certified financial planner based in Clifton Park, New York. "For students with four-year college ambitions but less than competitive academic records, the two-year schools offer a great opportunity to buff up the vita and qualify for the four-year college as a transfer student,'' he says.

A good value

Just because public institutions cost less, that doesn't mean their academic choices are limited. At many community colleges, for example, students can choose among the same array of courses he or she would find at a brand-name college. And the quality may be comparable.

"Some of us who have sent young men and women to college have been dismayed to find out the cost is the same whether a given class is challenging or not,'' says Hughes. She suggests that parents think carefully about the value of the education their child will get and seek the lowest cost institution that will meet that child's needs. If your child is accepted into an Ivy League school, there's no rule that says she should go. You need to determine what value she might get from the school. If the college offers a particular specialty area that interests her, then spending extra money might be justified.

Salmen agrees. "My unscientific observation is that the students at the expensive schools in many circumstances did not get an education that is proportionately better when you do a cost-benefit analysis,'' he said. "There are exceptions to this, of course, but I do not think a family should automatically dive deeply into debt just because there student got accepted to the Ivy League school.''

Funding options

If you are saving for retirement and can't pay cash for college, there are plenty of other options for covering the costs.

  • Loans. The most common college funding source is government-sponsored student loans: Stafford Loans and Perkins Loans for students, and PLUS loans for parents. All have favorable interest rates and reasonable payment terms. If your home is paid off or has significant equity in it, then you might consider taking out a home equity loan, which "...can provide a tax-favored college funding vehicle,'' Salmen says.
  • Grants and scholarships. Your student may also be eligible for a grant or scholarship that does not have to be repaid. ``Many elite private schools have huge endowment funds and may be willing to help the right student meet the funding shortfall,'' Salmen says.
  • Work-Study. Students can also enter work-study programs during college, and some employers are willing to pay college tuition for employees.
  • Military service. The US military will give students funds for college if they're willing to serve their country.
  • Gifts from grandparents. "The best funding option is wealthy grandparents who want to help,'' says Johnson. If you know your parents are planning to leave you an inheritance someday, it might be time to ask for an advance on some of the money.

Salmen cautions that you should not draw down your own retirement savings. It almost never makes sense to take money out of IRAs, a 401(k) or another retirement plans. Most have early withdrawal penalties, and the money is taxable.


Get your child involved

Financial planners agree the college funding decision should be a family discussion. Your child can take part and learn some valuable money lessons. "It's critically important. Whenever your family begins to talk about college with the student, that is the opportunity to set expectations,'' says Hughes. Students need to take responsibility for choosing a course of study that aligns with the total cost of their education and what they can reasonably expect to earn by using it in the workplace.

In addition, "It is absolutely essential that parents and college-bound students have conversations about money, budgeting, and finances before the student heads off to college,'' Salmen says. Students have many opportunities to run up credit card debt, excessive telephone bills, and overdraft charges. Open and effective communication will help to prevent these problems. Decide in advance who will pay what bills and what spending limits will be in place.

Even parents who can handle college costs themselves can encourage their kids to share some of the costs, perhaps through earnings from a part-time job or summer work. A student is more likely to value her education if she takes an active role in planning and financing it.

Related links

FinAid!
The College Board
U.S. Department of Education