4 Reasons Saving for College Doesn’t Make the Grade

Saving for College© iStockphoto/Thinkstock

College tuition in the United States can be expensive — very expensive! So it’s only natural that many parents set up a college account as soon as a child is born and make it their first priority when it comes to savings. According to two recent articles in Forbes, however, doing so may not be the wisest choice.


1. Saving for a rainy day comes first.
Before putting any money into a college fund or retirement account, everyone should have personal savings that can be easily accessed without penalty should the unexpected happen. Financial planners recommend maintaining savings of at least five to six months’ salary in case of emergency.


2. Retirement savings comes next.
You may not like the idea of your child taking out a loan for college, but they are available. Loans for retirement, on the other hand, are not. Experts agree that many people simply don’t plan adequately for retirement (do you have $1 million in your IRA?) and end up saving too little to allow them to retire when and how they’d like to.


3. Curbing your spending is crucial.
Even if you are saving for retirement through a 401K, an IRA, or both, it’s important to examine what you do with the rest of your earnings. If every dollar in your paycheck is already accounted for before it’s even deposited (bills, mortgage/rent, food, childcare, etc.), there’s not much left over for college savings. Before making regular contributions to a college fund, you’ll need to rein in your spending in other areas.


4.  Financial aid formulas favor retirement savings.
Colleges determine which students are eligible for financial aid based on an incredibly complex formula that takes into account something called an “expected family contribution” or EFC. According to college finance professionals, the formula works in favor of families who contribute the maximum to 401K and IRA accounts before funding their children’s college savings accounts. So, ironically, the best way to ensure your children will receive financial aid from their college or university is to put as much savings into your retirement account as possible, even if it means putting little or nothing into their 529 plans.


For more about the perils of saving for college, read the full articles at Forbes.com:


Why You Shouldn’t Be Saving For College

Another Reason You Shouldn’t Be Saving For College

Source: Forbes.com

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