Saving for your child's college education and protecting your retirement

The cost of college in the U.S. is at an all-time high. According to the National Center for Education Statistics, for the 2016-2017 academic year, tuition, fees, room, and board averaged $17,237 per year at public institutions and $44,551 at private nonprofit institutions.

The burden to pay for a college education typically falls on both parents and their children. According to Fidelity's 2018 College Savings Indicator, only 29% of parents are planning to pay their children's college costs in full, while the average parent plans to pay 62% of the total cost, down from 70% in 2016. Even as more parents are starting to save when their children are younger, three out of 10 parents aren't saving for college at all.

Many times, parents can feel as if they have to choose between saving for their own retirement and saving for their children's college. Putting retirement first is always ideal, according to Dave Ramsey, radio show host and author of The Total Money Makeover. As Ramsey says, "College savings by parents to pay for school is a nice thing to do, but it is a luxury. It is not a necessity. Retiring is a necessity."

By making smart financial moves early on, it is possible to start saving for college and planning for retirement at the same time. Here are some college savings options to consider.

Set up a 529 college savings plan

As soon as your child is born, ideally, you'll set up a 529 savings account for them. Then, when they need the money for college, you'll be more likely to have it. Brianne Soscia, a Certified Financial Planner™ (CFP®) with The Wealth Consulting Group, says, "We recommend to our clients to begin saving for their children's college education as early as possible to avoid as much student loans and debt as possible."

A 529 college savings plan is an education savings account whose earnings are tax-free on the federal level when the money is used for qualifying educational expenses. Nearly every state offers a 529 plan, and earnings also may be free of state income tax when used for qualifying expenses. You'll want to research your state's plans.

There are typically two different types of plans: the College Savings Plan, which works like a Roth 401(k) or Roth IRA in that you invest your after-tax contributions into mutual funds or other investments, and the Prepaid Tuition Plan, which allows you to prepay tuition for an in-state university or college. Additionally, a group of private colleges offer the Private College 529 Plan, which lets you prepay for participating private colleges and universities.

Choose a cheaper college

Often, parents will be so focused on saving for college that they forget about looking into cheaper college options. Sending your child to an in-state school, or at least a school where they receive significant financial aid and/or scholarships, are both excellent options.

"When kids get to choose whatever school they want to go to, regardless of cost and/or the expected career economic payoff after graduation, it can destroy parents' retirement accounts," says David Flores Wilson, CFP®, CFA, CDFA® of Planning to Wealth. "Too often, when faced with an expected shortfall and having to choose between funding an expensive college education for their kids and funding retirement, many parents choose funding college at the expense of their retirement."

Avoid a sticky student loan situation

Unlike other types of loans, it is incredibly difficult to get rid of federal and private student loans, even if you declare bankruptcy. If parents are taking out student loans for their children or cosigning loans in case their children default, this is putting their retirement at risk. Parents should do their best to circumvent taking out loans in the first place.

"Try to avoid student loans if possible by searching for scholarships or grants," says CPA Logan Allec of Money Done Right. "However, student debt is often unavoidable. If you find yourself in this situation, make sure to pay off your debt as quickly as possible so you can start saving for retirement."

Hire a good financial advisor

When you're trying to figure out how to start saving for college, it's best if you work with a financial planner or CPA. "Parents should run projections, taking into account income, expenses, assets, debts, and an expected college budget to see if they are on track for both retirement and paying for college," says Wilson.

At the end of the day, if you have to choose between retirement and saving for college, your own retirement needs to be the priority.

"You cannot take out a loan to fund your retirement, but your child can take out a loan to fund their education," says Michael Gerstman, ChFC®, CLU, and CEO of Gerstman Financial Group, LLC. "If you take out a loan or agree to service the debt, you are setting yourself up for a significantly more difficult retirement with potential cash flow issues. Living expenses will be sacrificed to pay the debt."

Sending your kids to college is important, but saving for your own retirement should be the priority. By looking for cheaper college options, saving for college with a 529 college savings plan, avoiding student loans if possible, and finding the right financial advisor to help guide you, you can be on the right track to have money for both.