BOSTON — There are dilemmas and then there are dilemmas. And parents who have to save for college and save for retirement at the same time have the mother and father of all dilemmas.
"It's tough," said Rande Spiegelman of Charles Schwab. "Doing either one is tough enough. But put them together and it's even tougher."
Tough at one end and near impossible at the other. So what are parents to do? Should they sacrifice their retirement by saving 100 percent for their children's college education or should they sacrifice their children's college education by saving 100 percent for their retirement or should they strive to seek a balance between saving a bit for college and a bit for retirement at the same time?
"It's a question of unlimited wants and limited resources," he said. "Ultimately, it's about compromise."
But when push comes to shove, Spiegelman and other experts say parents should adopt the in-case-of-emergency-oxygen-masks-will-drop approach. That's the approach that suggests adults in an airplane emergency should put the oxygen masks on their own face before putting the mask on their children's face. In other words, parents should save first and almost exclusively toward their own retirement before saving for their children's college expenses.
"There are lots of options to finance college but not so many for retirement," said Joseph Hurley of Savingforcollege.com LLC.
Yes, parents can't take out loans to finance their retirement. But children (and parents) can take out loans, apply for scholarships, work full or part time, receive grants and reduce their education costs by attending public schools, for instance. What's more, parents can reduce their standard of living and/or perhaps increase their income and use the pay-tuition-as-you-go system.
The bottom line, however, is this: "You don't want to deplete your resources to pay for college and then turn to the kids to have them pay for your retirement," said Hurley.
Depleting your resources isn't an option, but creativity is. Here's what experts say parents and children should do to save and pay for college without sacrificing their own retirement.
First and foremost, a reality check is in order. Parents need to understand college costs and return on investment. For instance, it cost $33,301 for a student to attend a four-year private school in 2006-07 and $16,357 for a student to attend a four-year, public school, both of which were up about 6 percent from the previous year, according to the College Board.
"People with a bachelor's degree earn nearly twice as much on average than those with only a high school diploma," says the board's Web site. "Over a lifetime, the gap in earning potential between a high school diploma and a B.A. (or higher) is more than $1 million."
Understanding the cost of college is one bit of education required. Another is learning the ins and outs of financial aid — loans (especially the chapters on Fee Application for Federal Student Aid or the College Board's CSS POFILE forms), scholarships, military aid, tuition discounts, and government programs that will pay off a student's loans.
Hurley recommends checking FinAid and the U.S. Department of Education Web sites.
"It's amazing how many people don't understand 'expected family contribution' and how it affects a financial-aid package," Hurley said.
The expected family contribution or EFC is the amount of money a family will be expected to contribute to a student's education, according to FinAid. The EFC is subtracted from the school's 'cost of attendance'... to arrive at the student's financial need. The lower the EFC, the more financial aid you will get.
Many people spend a lot of time and energy making sure their assets are held in the right names and places, but "all that effort goes to waste because families don't realize that assets are just one part of the equation," Hurley said. "Income is another part of the equation and it counts more than assets. And many people won't qualify for needs-based financial aid because of that."
One word of caution: Hurley said many of the college-cost calculators online assume that the entire four years must be paid when the student is a freshman. And that's not realistic. Most parents will need to save for or pay for college over the course of four years and that could change one's savings plan. Another site to visit to learn more about the financial-aid formula is the FAFSA4caster.
Spiegelman recommends that parents and their children be pragmatic and realistic about college. Time was when parents could pay for their children's college and still retire in comfort. Except for the most affluent and lucky of Americans, those days are long gone.
Today, for instance, parents must reconsider the value of a public college vs. a private college.
"A four-year degree at a top-notch school is not a defining achievement," he said. In fact, he suggests that an education at an in-state public school should be more than sufficient for most students. And if one wants to attend a top-notch private school, then good grades and diligent studying are the paths to that destination.
Parents might also consider delaying their planned year of retirement as one way to pay for college and students should consider working part time while in school or full time during summer breaks to chip in.
In addition, he says some students should consider attending a junior or community college for two years and then transfer to a four-year school. This not only saves on tuition but also saves on room and board when students live at home too. "No one ever remembers what school you started at, they remember only what school you graduated from," he said.
Spiegelman does not, however, recommend that parents raid the piggy bank - either by taking out a 401(k) loan or tapping the equity in one's home - to pay for college. That would be foolhardy on many fronts, he says.
As for those who have the ability to save for college and retirement at the same time, Spiegelman says parents should consider using tax-advantaged investment accounts such as 529 college savings plans and the Coverdell Education Savings Accounts. Learn more about those accounts at these sites. (The "Parent Trap" site and the "Life-stage Investing for Retirement site.)
Hurley is in the camp that saving even as little as $25 a month in a 529 plan is a worthwhile idea. "That level of contribution won't keep up with tuition inflation but at least it provides some college-savings discipline and keeps the goal in front of them as the monthly or quarterly statements come in," said Hurley.
Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.