Should You Pay Off Debt or Save for Child’s College?

​If you’re in your 40s or 50s, you may be at a career stage where your income is higher than it’s ever been. It’s common for workers to see sizable increases in compensation as they enter the later stages of their career. Their accumulated experience and knowledge help them take advantage of promotions, raises and new opportunities.

Of course, as your income increases, you may face a dilemma about how to best use that money. If you’re already maximizing your retirement savings, you may be thinking about other goals. One common financial goal is to fund a child’s education. Another is to completely eliminate debt.

The question is which should be the bigger priority. Debt elimination can help you strengthen your financial foundation and improve your cash flow and quality of life in the future. College savings can help your child start their career on the right foot, without the burden of costly student loan debt.

Which goal should you focus on? There’s no right or wrong answer. It depends largely on your unique needs and goals. Below are a few important points to consider as you decide how best to allocate your savings:

Reasons to Eliminate Debt
Debt is a natural part of financial life for many Americans. According to a Nerdwallet study, the average household has $132,000 in total debt.1 That includes credit card debt, student loans, mortgages and more.
 
The truth is that debt isn’t always a bad thing. When used to fund valuable assets such as a home or an education, debt can be helpful. However, other debt, like credit cards, can be corrosive. Also, once you retire, you may have a fixed income, which could make it difficult to service outstanding debt.
 
There are plenty of good reasons to eliminate debt. You eliminate the money that’s used to pay interest and fees every year. You free up cash flow, which could help you save more in the future. And you could decrease your planned expenses in retirement.

Reasons to Save for College
Funding education is a common goal for most parents. You want the best for your child, especially when it comes to education. Generally, a higher-quality education will lead to more career opportunities.
 
You also may want to help your child avoid student loans, which can be problematic at the start of your child’s career. Of course, student loans may not just be a problem for your child. Many loans require a parent to co-sign. So even if your child takes loans, you could be on the hook if they can’t pay.
 
The good news is there are a variety of tools you can use to save for college. Perhaps the most popular is the 529 plan, which allows you to save for retirement in a tax-deferred and possibly tax-free manner. You can also use trusts, life insurance and even Roth IRAs to give your child the type of education they deserve.

How to Balance Both Goals
The good news is that you don’t have to choose between one goal and the other. The two aren’t mutually exclusive. With a detailed, comprehensive plan, you can develop a strategy that allows you to minimize debt and save for college.
 
Your plan should start with a thorough analysis of your needs and the potential resources needed to reach your objectives. Then you can review tools that you can utilize. For instance, you may be able to consolidate debt into low-interest vehicles that allow you to pay off balances faster. You may find that your child qualifies for scholarships, grants and other aid that could minimize your need to save. A plan can give you greater insight and clarity into each goal.
 
Ready to develop your strategy? Let’s talk about it. Contact us at Carstens Financial Group today. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.

 
1https://www.bloomberg.com/news/articles/2016-12-15/average-credit-card-debt-16k-total-debt-133k-where-do-you-fit-in
 
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