Balancing College Costs with Retirement Planning

If you are within five years of retirement and still financing a college education — or two — you are not alone. Millions of American parents find themselves caught between two of the largest financial obligations of their lives at the very same time. The good news is that with a clear-eyed strategy, you can support your children’s education without derailing the retirement you have spent decades building.

The key is understanding what must be protected, what can be shared, and where there is room to be creative.

1. Retirement Savings Come First — Always

This may feel counterintuitive for parents who want to give their children every advantage. But the financial logic is clear: your children have decades ahead of them and access to scholarships, work-study programs, and student loans. You do not have access to a “retirement loan.”

At a minimum, continue contributing enough to your 401(k) or 403(b) to capture your employer’s full match. That match is an immediate, guaranteed return on your money that no college savings account can replicate. Cutting contributions now, even temporarily, can cost you far more in compound growth than the tuition savings would be worth.

2. Take Advantage of Catch-Up Contributions

Once you turn 50, the IRS allows you to contribute more to tax-advantaged retirement accounts than younger savers can. In 2025, the catch-up provision lets you contribute an extra $7,500 per year to a 401(k) beyond the standard limit, and an additional $1,000 to an IRA. If you are not yet maximizing these catch-up contributions, now is the time to start.

Every additional dollar you shelter in a retirement account before you stop working reduces your tax burden today and builds the cushion you will depend on tomorrow.

3. Understand How Your Assets Affect Financial Aid

Here is something many parents overlook: money saved in your retirement accounts — 401(k)s, IRAs, and similar vehicles — is generally not counted as an asset on the FAFSA (Free Application for Federal Student Aid). Your home equity is also excluded from the federal formula.

What does count? Money in taxable brokerage accounts, savings accounts, and — critically — 529 college savings plans owned by a parent. This means that how you hold your assets can have a real impact on how much aid your children qualify for. Before shifting money around, consult a financial advisor who understands both retirement planning and financial aid rules, as the calculations can be nuanced.

4. Make a Realistic “College Budget” and Communicate It Clearly

With two children heading to college in overlapping years, the costs can stack quickly. Before writing a single tuition check, sit down with your children and establish what you can honestly afford to contribute each year without compromising your retirement timeline.

Consider the following as part of that conversation:

• How much can you contribute annually without reducing retirement contributions or drawing down savings?
• Are in-state public universities, community college transfers, or honors college scholarships on the table?
• What is a reasonable amount for your children to contribute through part-time work or modest loans?
• Are there grandparents or other family members in a position to help?

A clear, honest budget is not a failure of parental generosity — it is one of the most practical gifts you can give your children before they leave home.

5. Explore Direct Tuition Payment Strategies

If you have grandparents or other relatives willing to contribute to college costs, direct tuition payments made directly to the educational institution are not subject to gift tax and do not count against the annual gift tax exclusion. This can be a powerful, tax-efficient way to bring in outside support without affecting financial aid calculations.

For your own contributions, paying tuition directly from cash flow — rather than liquidating investments — is generally preferable when possible. Selling appreciated assets triggers capital gains taxes; depleting an emergency fund creates new vulnerabilities.

6. Consider a Part-Time Work or Bridge Strategy

If your retirement date is flexible by even one or two years, continuing to work — even part-time — while your children are in college can make a significant difference. Those additional earning years reduce the gap between what you have and what you need, allow more time for compound growth, and may allow you to delay Social Security, increasing your monthly benefit permanently.

This does not mean postponing retirement indefinitely. But a targeted, intentional bridge period, especially if you enjoy your work or can shift to a less demanding role, can give you the financial breathing room to support both goals without sacrificing either.

7. Revisit Your Investment Allocation

With retirement five or fewer years away, many financial advisors recommend gradually shifting your portfolio toward a more conservative allocation to reduce exposure to market volatility. However, this does not mean abandoning growth entirely — you may be in retirement for 25 or 30 years, which requires continued growth to sustain your lifestyle.

Work with a fee-only fiduciary financial advisor to stress-test your retirement timeline against realistic scenarios: What if markets decline 20% in year four? What if tuition costs rise 5% annually? Understanding your vulnerabilities now allows you to make adjustments from a position of clarity rather than crisis.

8. Use Student Loan Options Strategically — But Carefully

Federal student loans are not inherently bad — in modest amounts, they can be a reasonable tool that preserves your retirement savings. What you want to avoid is the Parent PLUS Loan trap: high-interest federal loans taken out in your name that become your debt, not your child’s.

If loans are part of the plan, prioritize your children taking out subsidized and unsubsidized federal loans in their own names first. Keep any parent borrowing to an absolute minimum, and only if you have a clear plan for repayment before or shortly after you retire.

9. Do Not Overlook Scholarships and Merit Aid

Many families with moderate-to-high incomes assume they will not qualify for financial aid and stop there. But merit scholarships — awarded based on academic achievement, talent, or specific interests — are available at virtually every institution and are not need-based.

Encourage your children to apply broadly and to target schools where their academic profile places them in the top tier of applicants. Schools competing for strong students often offer generous merit packages to attract them. A student who is an average applicant at a highly selective school may be an exceptional candidate — and a well-funded one — at an excellent second-tier institution.