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Just Explain It: Retirement vs. College Savings

Zelkadis Elvi

With the cost of education rising, many parents have to decide how to pay for college.

Earlier this year, a report found that the average tuition at four-year public universities increased by 15% between 2008 and 2010. Significant price increases were also found at private universities.

The National Center for Education Statistics estimated that an undergrad in 2010 paid an average of over $13,000 to attend a public university. That includes tuition, room and board. Add $10,000 to that for a private institution.

As the price of a higher education continues to increase, it causes a parental dilemma. What's more important…saving for retirement or college? And how high should the college fund be on your financial planning priority list?

We spoke to financial advisor Troy Onink, CEO of Stratagee.com, to help make sense of it all. Onink says retirement should be your first priority.

Making contributions to your 401(K) plan is important. What you spend on college you don't have for retirement. And depending on your finances, Onink says saving for college expenses should be your next concern.

You can contribute to a college savings plan such as a 529. There's no federal tax break for contributions, but withdrawals to pay college bills are not considered taxable. Plus, growth is tax-free.

But, there are times when paying another bill would come before saving for college. A mortgage, credit card debt or other major bills might compete for a part of your income and in certain instances should be paid first -- if it will free up money that can then be saved or, if it will create a tax benefit.

Onink also suggests parents should pay off their own student loans before saving for their child's college education. But it depends on the interest rate on the loan, the balance, and repayment terms. He says generally the higher the interest rate, the sooner you would like to pay it off, and if you are able to deduct the interest.

And finally, Onink stresses that parents stand to lose a lot without a good financial plan. He encourages his clients to save as much of their money as possible, because in the long run it'll make paying for college a lot easier.

Did you learn something? Do you have a topic you'd like explained? Give us your feedback in the comments below or on Twitter using #justexplainit.