The Choice to Pay For College: Parents Can Use 529 Plans and IRAs to Get Ahead

The question may seem like a no-brainer, but the answer isn't always cut and dry.

The decision to save for your kid’s college education seems like a no-brainer. Considering how expensive tuition is these days (the average cost for a degree at a four-year private college is $138,960, according to the College Board), parents capable of doing so want to put money aside to secure their child’s academic ⏤ and eventually professional ⏤ future and to help their kids avoid student loan debt, which can be back-breaking. But the question of whether to save for college isn’t as cut and dry as many think. A lot of financial experts say that while saving for college is important, it should almost always take a backseat to retirement savings; the logic being that banks will happily loan students money for education, but they won’t loan senior citizens cash to play shuffleboard. And, yes, this is a genuine concern.

The more speculative anti-saving argument goes like this: Saving for college, parents actually hurt a child’s chances to qualify for financial aid, thus making it harder to afford a degree in the long run. By saving, the thinking goes, parents are volunteering to hand a college cash that it might otherwise have offset with a grant or scholarship. And the math isn’t always great. Dollars accrued in a  529 college savings plan make a difference, but $25,000 isn’t going to pay a $200,000 bill.

When it comes down to it, though, if there’s any chance that you’ll eventually help your child pay for college, then you should start saving now, says Mark Kantrowitz, publisher and vice president of research for savingforcollege.com and an advocate for 529 college savings plans. “Every dollar you save is a dollar less you’re going to have to borrow in the future,” Kantrowitz says. Assuming you’re not making a conscious parenting decision to let your child work their way through school, or you simply don’t have the funds to save, it doesn’t make sense not to put money away. “Most students will not be able to pay for college without some parental help,” Kantrowitz adds. “The federal government considers parents to be the primary source of money for a student. The primary responsibility for paying for college lies with the family and the government only steps in when the family is unable to pay.”

Kantrowitz notes that while there’s a “kernel of truth” to the idea that parent savings penalize a child’s aid eligibility, it’s a small penalty and one not worth avoiding. In fact, just the opposite. “On the FAFSA, the Free Application for Federal Student Aid, there are student assets and there are parent assets,” Kantrowitz says. “If you save money in a custodial banker brokerage account in your child’s name, not in a 529 account, 20 percent of the value of the assets reduces aid eligibility. If you saved in the parent’s name, it’s a bracketed system with a top bracket of 5.64 percent. Which means if you have $10,000 in a bank account in the student’s name, it’s going to reduce aid by $2,000. If the same $10,000 is in a parent-owned account ⏤ or a 529 college savings account owned by the student or the parent ⏤ it reduces aid by $564.”

“People worry too much that if they save money they won’t get any financial aid, particularly with a 529 or savings account that is owned by the parents,” adds Matt Becker, a Florida-based CFP and the founder of Mom and Dad Money. “Only about 5 percent of the money parents save is even counted in the FAFSA, so you could have $100k saved in a 529 account and the financial-aid formula only looks at around $5,000 of it. If you have the money, it’s better to save than to not save.”

That doesn’t necessarily mean, however, that college savings should be your top financial priority. Just that it makes more sense to save than not to save. “If you have limited money though, as most people do, I usually encourage them to make it a lower priority,” Becker says, stressing the importance of paying off debt, saving for retirement, and building an emergency savings fund.

Kantrowitz agrees, to a point. “There are certain things that you should always do before saving for college. If your employer matches contributions to your retirement plan, you should always maximize the match because that’s free money.” He makes the case though, that parents shouldn’t prioritize retirement over college savings but rather build both in unison. “You should save a reasonable amount for retirement and a reasonable amount for college. And in my opinion, people don’t save enough for college or retirement.” According to his calculations, parents who save for both retirement at college can still come out on top for both, and won’t suffer in their golden years.

“In the grand scheme of things,” he says, “You’re better off if you save for college. Because you’ll either end up with less debt at graduation or you’ll be able to buy up to a more expensive college than you otherwise could have afforded. Not only that, when you save for a child’s education, it increases the likelihood that they’ll enroll in college and graduate from college.”