Prioritize retirement savings over college funds, financial expert urges

Experts caution that neglecting retirement savings can lead to financial hardship later in life, as Social Security benefits alone, estimated at $2,170 per month after the 2027 cost-of-living adjustment, are often insufficient.

Kamel’s recommendation is supported by the differing financial landscapes of retirement and college. While students can borrow for tuition, there’s no lender willing to cover retirement expenses. For example, a 40-year-old mother with $300 monthly to spare could see $64,800 grow to $129,000 in an 18-year 529 plan. The same amount invested for retirement could reach $242,000 by age 67.

Conversely, a student taking out $30,000 in federal loans at a 7% interest rate would accrue roughly $10,900 in interest over a 10-year repayment plan. While scholarships, in-state tuition, and community college offer alternatives, a parent facing retirement with insufficient savings would need to invest approximately $1,616 monthly for nine years to recover the lost ground.

The advice shifts if a household already invests 15% or more for retirement. In such cases, a 529 plan becomes viable, offering tax advantages under 26 U.S.C. § 529(c)(1), with the option to transfer up to $35,000 into a Roth IRA. Ramsey hosts noted they receive more calls about student loan debt than about overfunding college savings.

To assist with college expenses without jeopardizing retirement, experts suggest contributing 15% of gross household income to retirement first, then utilizing a 529 plan. Family gifts, such as birthday and holiday money, can be directed into the 529, treated as completed gifts under § 529(c)(2)(A)(i). Parents should avoid Parent PLUS loans and home equity lines of credit, which carry high interest rates and impact those with fewer working years.

Open communication about finances is also crucial. Setting expectations early and comparing school costs, including tuition, scholarships, and community college options, can prevent unnecessary debt. The introduction of a $20,000 annual cap on Parent PLUS loans may prompt more families to reassess their retirement savings rates before pursuing college savings.