What to do about junior.

• Author: Wilsey, Brent M.
• Position: Education

"... You must have a full understanding of your financial situation" before sending your child off to college.

When those college acceptance letters start to roll in and the stark reality that college tuition, books, supplies, and housing are "imminent financial threats" for families with high school seniors poised for higher education this fall (or summer for some), it would be wise to clarify any confusion and get some insight on a couple of financial-, investment-, and retirement-related questions.

Should you raid your retirement fund to pay for Junior's college costs? Saving for retirement and paying for your child's college are two major expenses that parents face throughout their financial lives. The top priority here should be making sure you are saving enough for retirement. You always can borrow money to help pay for your children's education but, if you are not set up properly for retirement, as it approaches you may have to work during years you envisioned sitting on the beach or playing golf.

To fully appreciate this picture, you must have a complete understanding of your financial situation. This includes understanding your income and expenses to see if you can pay for college and save for retirement. If you decide to forgo investing for retirement to pay for college, you must think about the effects it will have on your cash flow in retirement.

I never would recommend pulling from retirement accounts to pay for college, because the penalties can be detrimental to your financial life. Not only will you have to pay income tax on the money you pull out of many retirement accounts, but you may be faced with a 10% penalty if you are younger than 59.5 years old.

Many people are scared to borrow that money for college, but oftentimes it is the best option. If you borrow money at a rate of five percent to pay for school, can keep your retirement in place, and have it grow at eight percent to 10%, then you are in a far better situation than had you pulled from the account and paid heavy penalties.

When is it smart for college students to buy rather than rent housing? Buying versus renting for college students may sound like a great investment idea, but it is important to think about many of the potential risks. A number of investors feel comfortable with real estate due to its tangible nature but, over the last 20 years, homes on average have appreciated by just 3.4% year. Compare this to the average growth of the S&P 500 at 8.2% per...