By Alessandra Malito
Aug. 10, 2019
Sacrificing your retirement savings to send a child to college benefits no one—not even the student.
Yet parents wonder what they should do to help their children pay for a post-secondary degree. Some consider raiding their retirement accounts, such as their 401(k) plans and individual retirement accounts, while others stop investing for retirement altogether to fund a college savings account during some of their best earning years. A few will choose to co-sign student loans instead, which is equally as dangerous.
What you should know: A college education has become significantly more expensive than it was decades ago, when current students’ parents were attending. The average 2018-2019 cost of in-state tuition and fees at a public four-year college was three times as high as it was in 1988-1989, adjusted for inflation, according to the College Board. Students in the U.S. have amassed more than $1.5 trillion in student debt, and they, along with parents, financial advisers and lawmakers, are trying to find a way to dissolve it. At the same time, Americans are vastly undersaved for retirement. To siphon what savings a parent has for a college tuition could be catastrophic for their retirement.
How to tackle the issue: Financial advisers warn parents to never commit more of their finances to education than retirement. But there are ways to make it work for those hoping to help their children earn a Bachelor’s degree with as little debt as possible while also eventually retiring comfortably.
If you’re a parent with a young child, it might be okay to stretch your savings, so that equal amounts are going toward an education and retirement. Never completely stop adding money to the retirement account, since it will be hard to catch up later (and you’ll also lose all potential earnings from investment returns and interest).
Take for example, a parent 10 years away from retirement looking to take $50,000 out of an individual retirement account (which is a non-tax deductible account). Assuming an average return of 5% as well as 0.25% in investment fees, that parent would lose out on more than $29,000 over the next decade if she made that withdrawal for her child's college education, according to Andrea Feirstein, managing director of AKF Consulting. Comparably, a $50,000 ten-year student loan, payable each month at an assumed cost of 6%, would equal total interest payments of about $13,130.
It is best to create a financial plan, perhaps with a financial adviser, to determine how much money needs to be saved for future tuition and retirement, how much of each paycheck you'd need to save or invest and other pertinent factors, like investment return, interest and inflation rates.
There are other tools and strategies to help get a child through college too, such as investment accounts specifically earmarked for education (like 529 plans and Coverdell savings accounts) and scholarships. Talk to your child about alternatives like financial aid or working during semesters or the summer to quickly pay off a loan. Some students may also decide to start at a community college for two years, and then transfer to another school, which can save money and time in deciding a major or profession.
Be cautious about agreeing to any loans.
Almost 2 million people between 50 and 65 years old took out Parent Plus loans as of 2015, and another 200,000 were over 65, according to the Government Accountability Office. A lack of retirement savings, or a loan over your head, could mean a delayed, or rough, retirement. An adult child can take a loan out for tuition, but a parent can't take a loan out for retirement.
This Barron's article was legally licensed by AdvisorStream.
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