Unconventional Advice For Education Funding

The December 5, 2011, edition of Forbes has its 2012 Investment Guide.  This annual special report is the most sound and sophisticated guide published in a general interest periodical.  It leans heavily on conventional wisdom, but always brings an analytical eye to the task, and often has challenging observations.  One suggestion in the section on Generation Xers, caused me to pause because, while it is diametrically opposed to the almost universal standard recommendation, the explanation is elegant and nearly unassailable.

Karen Hand, a financial planner from San Francisco, recommends allocating any funds that would go into an education account into the parent's retirement account.  The economics are such that no parent can reasonably expect to save enough to put multiple children through college on savings plans, and it is perfectly acceptable to expect the child to pay some portion of his educational expenses, either by working while at college or paying off student loans after finishing.  And now the kicker:

Current financial aid formulas don’t consider money in retirement accounts as available to pay the college tab. But when calculating how much parents can pay from their current income, these formulas don’t allow for any retirement savings while the kids are in college—even though parents are likely to be approaching retirement.

That makes it smart to stuff your retirement accounts while your kids are young and then reduce or stop annual contributions while they’re in college to free up cash for tuition payments, say college financial planning experts.

That is, under the financial aid formulas, a parent gets 100% benefit of the dollar he puts in his retirement account, but only a tax effect benefit from a dollar contributed to a 529 account.  The additional funds in the retirement account ill make up for the holiday during the kids' college years by being exposed to a longer compounding period.

And of course, the kids are on their own for any graduate degrees.