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Before Saving For College

by Kevin McKinley - February 14th, 2016

Posted Under: college

According to the most recent College Savings Indicator study from Fidelity Investments, younger parents named “saving for college” their top financial priority.

That’s an understandable sentiment, since many of those moms and dads are either saddled with their own student debts, or fearing what the cost of college might be in a decade or two (probably both). 

But there are a few financial steps that should be taken before putting aside any money for their kids’ educations. 

1. Save for retirement

You and your kids can borrow money to pay for college, but there is no such thing as a “retirement loan”. Therefore, fund your own future first before worrying about your kids. 

If you contribute to a pre-tax plan (like an IRA or 401k), you’ll save anywhere from ten to 40 cents in taxes for every dollar you deposit. 

Then, once you’ve addressed more pressing money needs, maybe you can use those tax savings as the basis for a contribution to a college savings account. 

And once you’re on track to retire, you can use any extra funds to pay directly for higher education expenses, or pay off your children’s student loans.  

As an added advantage, money accumulated in retirement accounts generally isn’t included in the formula used by schools to calculate need-based financial aid. 

But contributions made to retirement plans while you’re applying for financial aid are included in the formula. So you’re better off saving for retirement sooner, rather than later. 

2. Plan for the worst

A lack of funds to pay for college isn’t a good thing, but what’s way worse (albeit way less likely to occur) is if one or both of a child’s parents aren’t around to care for the child, and support her in to adulthood. 

You should have an updated will, powers of attorney, and guardians named for any minor children. You should also have enough life insurance (preferably the “term” version) on the lives of both parents to make sure that there is enough money for the kid’s college costs, plus any living expenses incurred before, during, and after college. 

Finally, while you’re establishing the other aforementioned estate documents, you may want to have a lawyer establish a trust to hold those life insurance proceeds. This step will ensure that the money is only used by your child at a time and for a purpose that you prefer. 

3. Pay down your debt?

Responsible young parents are often rightfully averse to any kind debt. And credit cards or other personal loans with double-digit interest rates should be retired as quickly as possible, especially before saving any money for college. 

Your credit score will improve, which will make it more likely that other loans can be obtained, and at the most favorable terms available. 

But other current low-interest loans such as a mortgage, federal student loan, or vehicle loan should be paid with the minimum monthly payment, and that’s all. Any extra funds should go towards . . .

4. Your rainy day fund

You should track your typical monthly expenses, and then look to reduce or eliminate any of that spending that you can. Then start accumulating a few months’ worth of your expenses before moving on to those other goals mentioned previously. 

For instance, don’t save any money in a pre-tax retirement plan until you have three months’ worth of living expenses set aside in your bank or credit union checking or savings account. 

Don’t pay off any high-interest debt (beyond the minimum monthly payment) until you have six months’ worth of living expenses set aside. And even then, only use enough of those funds to pay off debt and still maintain the six months’ expense figure in the account. 

Next week

Once you’ve got the above subjects taken care of, you need to know the smartest ways to save for your kids’ higher education costs. So we’ll tell you where to start (and the answer may surprise you).