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Five things to consider before prioritizing your kids' college ahead of your finances.

As parents, we naturally seek the best for our children and grandchildren. However, tapping into savings or borrowing money to finance their college education can jeopardize your financial health. Understanding five potential pitfalls of prioritizing the funding of another person’s post-secondary pursuits could ensure a bright financial future for both of you.

1. You risk a savings shortfall.

Spending discretionary income on college expenses often leaves parents ill-prepared to take care of themselves after they exit the workforce. By neglecting retirement investing, your nest egg may not keep up with inflation and healthcare costs post-career. “Parent borrowers should remember Parent PLUS and similar loans can take decades to pay off,” says John Ludlow, senior financial planner, Commerce Trust. “These loans are also not designed to be part of Public Student Loan Forgiveness (PSLF) or similar programs available to help give student loan borrowers relief. Having these loans later in life, especially when considering retirement, can greatly hinder your ability to live the life you wish to live in your ‘third act’.”

2. You gamble with your credit health.

The importance of a good credit score persists into retirement. For instance, older adults may need to borrow money to pay for home accessibility modifications, for automobiles, vacation homes, etc. This might include installing stairlifts or walk-in showers, which can be costly. Plus, your good credit could help lower other expenses, like auto insurance premiums.

If you co-sign a loan and your student does not make the required payments, you become responsible for the loan. Taking on debt that you can’t afford — even co-signing on someone else’s debt — could damage your credit score and your ability to secure financing for personal needs.

3. You threaten your ability to experience a comfortable retirement.

Insufficient savings reduces the likelihood that you’ll have enough money to support yourself financially once you stop working. “Remember, most workers today will not retire with a pension to give them income in their retirement years. This means many retirees will have Social Security income and whatever they have saved for themselves in 401(k)s, IRAs and so on. Social Security may help, but everyone should save as much as they can as early as they can for their own retirement to supplement this limited stream of income,” says Ludlow. Insufficient savings could necessitate a return to the workforce or result in a reduced standard of living. Saving more now can help ensure you'll have the retirement income you need to enjoy your twilight years.

4. You limit your ability to transfer generational wealth.

Generational wealth is the transmission of assets from one generation to the next. By prioritizing retirement savings, you give yourself the ability to provide for future generations through inheritance. Withdrawing funds from investment accounts to pay for college expenses not only diminishes the inheritance for your heirs, it also reduces potential compound interest earnings. Additionally, if you withdraw from a pre-tax retirement account like a 401(k) or IRA prior to age 59½ to pay for those expenses, you could be faced with early withdrawal penalties on top of already-high income tax rates.

5. You compromise your ability to maximize your savings.

Employer-sponsored retirement accounts, like 401(k), 403(b) and 457 plans, help workers invest in their financial futures with regular financial contributions. But once you enter retirement, there are far fewer options. Remember, college students have access to financial resources unavailable to most retirees. There are no cost-of-living grants or scholarships designed to fund your retirement years.

Taking on debt or emptying savings earmarked for retirement to pay for higher education expenses could prove costly in unexpected ways. Encourage your student to seek alternative means to fund their education by speaking with the school’s financial aid office. “Remember, your retirement savings plan should be designed to support you and your life during your retirement years,” says Ludlow. “Helping to fund your children’s education, while noble and kind, may very well reduce your standard of living now, and even that same child’s standard of living in later years in the form of less inheritance due to education costs that ended up burdening the family as a whole.”


The opinions and other information in the commentary are provided as of 03/19/24. This summary is intended to provide general information only and may be of value to the reader and audience.

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Commerce Trust is a division of Commerce Bank.

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