Retirement Today
Charlie Neibergall  /  AP
"My husband and I both paid for our college," said Kathy Bell, pictured with her husband, Bart, and their daughter, Emma. "We didn't want her to start out in all that debt."
updated 11/26/2008 3:59:10 PM ET 2008-11-26T20:59:10

The stock market slide that has decimated savings for retirement and college savings with equal savagery is forcing many parents into an uncomfortable choice of where to cut back first.

Common sense and mathematics make it a straightforward call in the eyes of many financial planners: Even if college looms soon for your child, retirement savings has to be the top priority. As a wise maxim goes, you can take out a loan for college but you can't take out a loan for your retirement.

But cold financial logic doesn't always prevail when decisions involving children's goals are involved.

"I've seen too many horror stories where people feel this obligation to pay for their children's college because maybe their parents paid for theirs," said Drew Denning, vice president of income solutions for Principal Financial Group Inc. "They're five to ten years from retirement and it jeopardizes their retirement income."

Nevertheless, planners say they're hearing from some clients who either have cut back on their 401(k) contributions or are considering it while plowing ahead with college payments or contributions to Section 529 plans — the state-sponsored programs for college costs that offer significant tax breaks.

The reluctance to back off on college savings is understandable in face of daunting costs. Tuition and fees have risen faster than inflation for years, and some experts think double-digit increases may be in store as many schools try to offset endowment losses.

Tuition alone for the 2008-09 school year jumped 6.4 percent to an average of $6,585 for in-state students at public four-year institutions and 5.9 percent to an average of $25,143 at private institutions, according to the College Board.

College fund left untouched
Squeezed by the economy, Kathy Bell of Grimes, Iowa, says she and her husband Bart recently cut their monthly retirement contributions in half to $500 while also reducing spending.

Left untouched is the $200 a month that goes into a 529 for 5-year-old daughter Emma. They want to be sure they remain on track to pay for half the cost of sending her to a state college.

The Bells know that strategy isn't advisable over the long term. They figure they have a lot of years left to save for retirement as well as college — Kathy is 34, Bart 39 — so they can get away with lowering their retirement setasides temporarily.

"My husband and I both paid for our college," Bell said. "We didn't want her to start out in all that debt."

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Some might see paying for college as a parental obligation; the Bells don't.

"It will be a gift," Kathy said of their financial commitment. "It's not that it would in any way make us better parents. It's just that we're able to do it."

Dan Bonder, 55, and his wife Joanne of Beachwood, Ohio, also trimmed their retirement contributions in half this year to focus on paying tuition or loans for their three children, all in private colleges as undergrads or in graduate school: John Carroll University, Kenyon College and Rochester Institute of Technology.

What's surprising about their actions is that Dan's a certified financial planner, so he knows he's bucking the traditional approach.

"You are better off normally saving for retirement if you've got an immovable goal in mind," he acknowledged. "But we decided we'd be willing to work a little bit longer so our kids wouldn't at least have undergraduate debt."

It depends on couples' individual priorities, he said. In their case, they have "a fair amount" of retirement savings already and have made it a very important goal to try to keep their children's loan obligations to a minimum, even if it means Dan needs to work into his 70s.

"It's a gamble either way," he said. "It's a gamble to say I hope I have enough healthy years in my retirement. I'm willing to take that chance."

The big reason is so his kids won't lose out on a chance to buy homes because of being saddled with a decade or more of loans to pay off. As a financial planner he recognizes that homeownership is an essential tool for building wealth and sees it as a priority for them.

Splitting the costs
Advisers often tell their clients to set aside a predetermined amount regularly that doesn't compromise their ability to save for retirement, then let their children pay the rest through grants, loans and part-time work.

While financial aid will only provide a fraction of what's needed in most cases, the responsibility of paying for college is typically shared by students and their parents. That was confirmed by a telephone survey last spring of more than 1,400 parents and students conducted by Gallup Inc. for Sallie Mae, the nation's largest student lender.

The survey found that parents contributed the largest share, paying on average for 32 percent through income and savings and borrowing for another 16 percent. The average student covered 33 percent of the cost, through borrowing (23 percent) and their own income and savings (10 percent). Grants and scholarships comprised 15 percent, and friends and relatives paid another 3 percent.

"Many parents need to hear that it is not a necessity to pay for college," said Trent Porter, a financial planner in Fort Collins, Colo.

Students who have a vested interest in their education may also be more motivated to succeed. Porter uses himself as an example: His parents agreed to pay for only his first year of college and he spent it close to academic probation. As soon as he had to start working and take out loans to keep attending, he said, he became a straight-A student.

Lynn O'Shaughnessy, a financial journalist and college planning expert, said the amount of stress over the college versus retirement dilemma is extremely high right now.

"Parents are very anxious because they've seen the money they saved for both retirement and college drop like a rock simultaneously," she said. "They're both incredibly important and I don't think there's any one answer."

What's essential, though, is to not stop contributing to your retirement, O'Shaughnessy said.

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