Don’t Let Kids’ College Expenses Ruin Your Retirement Finances
Parents must fund their retirement fully before chipping in for offspring; you don’t want to end up in Junior’s basement
There is no question that a college degree delivers an economic advantage. According to the U.S. Bureau of Labor Statistics, weekly earnings for someone with a bachelor’s degree are more than 30% higher than for a worker with a high school diploma. And during the heart of the Great Recession, the unemployment rate for college grads peaked at 5%, half the level for high school graduates.
What often gets overlooked is the cost of obtaining a college degree. A college degree that leaves a family in financial straits is not exactly a step forward. And plenty of parents are bearing a larger college-borrowing burden.
Student loan debt now hovers above $1.5 trillion, more than double the amount a decade ago. And parents are increasingly carrying college debt. According to the Federal Reserve Bank of New York, in 2017 student loan borrowers over the age of 50 had loans valued at more than $260 billion, compared to $72 billion a decade earlier. Sure, some of that may be lingering debt from parents’ college years, but much is parents’ borrowing to put their kids through college.
Parents are so intent on footing much of the college bill that 74% recently surveyed by T. Rowe Price said paying for college is a higher priority than saving for retirement. That’s your present bias showing, and that’s not exactly a compliment. Present bias is the wonky academic term for our habit to focus on what’s in our grill today, or the near future, and not focus on the longer-term implications.
Under the spell of present bias, paying for college even if it means not saving (enough) for retirement seems logical. Retirement may be decades away, and your kid is heading to college in three years. Priorities! But stop for a sec and realize what jeopardy you may be putting yourself and your child in. By making the choice to focus on college costs over retirement, you run the risk of ending up in a financial bind when you retire. And you know that if that happens, the concern and cost of helping you is going to boomerang to your adult kids.
In another recent survey, by Sallie Mae, just 59% of parents said paying for college should be a shared responsibility between the parent and child. Granted, that’s an encouraging increase from the 51% reported in 2016. But that still means four out of 10 parents don’t want to “burden” their kids with helping pay for their college education.
If you fall into that category, and you also know you’re not socking away the retirement savings, that’s a dangerous act of heart before head.
How to hatch a family-friendly college plan
Mom and Dad rock the retirement savings. That’s your highest priority. No ifs, ands or buts. Only if you are on track with having enough saved for your future security should you entertain paying for college out of current cash flow, or borrowing. That’s not denying your kid. It’s saving all of you from a lot of heartache and headache later on.
Create a financially varied college wish list. As early as sophomore year in high school, start family conversations about college affordability and set expectations. For instance, your child should pursue a dream school, but with the family understanding that if accepted, she will only attend if the aid package is sufficient. (Sufficient = you are not required to take on debt you can’t afford.)
Then add a few schools where there’s a strong chance your child may qualify for a solid aid package. You also want to have in-state pubic schools on the list. The lower tuition charged to residents makes it possible to get a college degree while relying solely on federal student loans. That’s the best way to contain your borrowing to a reasonable amount. (More on this in a sec.)
And don’t look past community college, which is the most affordable option. An associate’s degree may be plenty for your child’s career choice. Or with some careful planning your kid can spend the first two years at community college and then transfer to a state school as a junior. That will lower your family’s overall tab for college.
3. The kid borrows first. From the federal government. All undergraduate students are eligible for federal Stafford loans, regardless of family income. Staffords are fixed-rate loans, and the annual borrowing ranges from $5,500 for freshman to $7,500 in years three and four.
Moreover, the federal loan program provides a variety of flexible pay-back options that can help you navigate payments with a low income, or if you are unemployed.
Federal loans are a much more prudent move than having your kid take out a private student loan from a bank or financial service company. For these, your child will need a co-signer. That puts your financial life on the line. Private loans tend to be variable rate, and don’t offer flexible payment options. And there’s no preset limit on what you can borrow. Your kid may think that’s great today – Hey, I can go to my dream school! – but it can become a family nightmare when repayment starts.
Mark Kantrowitz, an expert in student loan debt, recommends that students limit their total undergrad borrowing to no more than they can reasonably expect to earn their first year out of school. His research shows that when borrowing is below that level, there’s less chance of falling behind on payments. Sticking with federal Stafford loans essentially serves as guardrails on following this strategy.
4. Parents borrow only if affordable. The federal PLUS loan program allows parents to borrow to pay for a child’s college. If you are on target with retirement saving and other long-term financial goals (paying off the mortgage, for instance) a PLUS loan may be a reasonable option. But be careful. For starters, there is no help on deciding what is an affordable amount to borrow. The program allows parents to borrow up to the entire cost of school – minus any aid – without anyone checking or suggesting if that is affordable.
Parents who borrow should keep it to a sum they are confident they can get paid off in 10 years (the standard pay-back period) or before retirement, whichever lands first.
Retiring in good financial shape, unburdened by debt payments, is how you help yourself and in the process help your adult offspring, who won’t have to step in with financial aid for an older you.