Financial Choices: College, Retirement, or Both?

Life is full of choices. Should you watch Breaking Bad or Modern Family? Eat leftovers for dinner or order out? Exercise before work or after? Some choices, though, are much more significant. Here is one such financial dilemma for parents.

Should you save for retirement or college?
DSCN8976It’s the paramount financial conflict many parents face, especially as more couples start having children later in life. Should you save for college or retirement? The pressure is fierce on both sides.

Over the past 20 years, college costs have grown roughly 4% to 6% each year–generally double the rate of inflation and typical salary increases–with the price for four years at an average private college now hitting $192,876, and a whopping $262,917 at the most expensive private colleges.

Even public colleges, whose costs a generation ago could be covered mostly by student summer jobs and some parental scrimping, now total about $100,000 for four years (Source: College Board’s Trends in College Pricing 2013 and assumed 5% annual college inflation). Many parents have more than one child, adding to the strain. Yet without a college degree, many jobs and career paths are off limits.

On the other side, the pressure to save for retirement is intense. Longer life expectancies, disappearing pensions, and the uncertainty of Social Security’s long-term fiscal health make it critical to build the biggest nest egg you can during your working years.

In order to maintain your current standard of living in retirement, a general guideline is to accumulate enough savings to replace 60% to 90% of your current income in retirement–a sum that could equal hundreds of thousands of dollars or more. And with retirements that can last 20 to 30 years or longer, it’s essential to factor in inflation, which can take a big bite out of your purchasing power and has averaged 2.5% per year over the past 20 years (Source: Consumer Price Index data published by the U.S. Department of Labor, 2013).

So with these two competing financial needs and often limited funds, what’s a parent to do?

conventional_wisdom_7-10-2012The prevailing wisdom
Answer: retirement should win out. Saving for retirement should be something you do no matter what. It’s an investment in your future security when you’ll no longer be bringing home a paycheck, and it generally should take precedence over saving for your child’s college education.

It’s akin to putting on your own oxygen mask first, and then securing your child’s. Unless your retirement plan is to have your children be on the hook for taking care of you financially later in life, retirement funding should come first.

And yet…
It’s unrealistic to expect parents to ignore college funding altogether, and that approach really isn’t smart anyway because regular contributions–even small ones–can add up over time. One possible solution is to figure out what you can afford to save each month and then split your savings, with a focus on retirement. So, for example, you might decide to allocate 85% of your savings to retirement and 15% to college, or 80/20 or 75/25, or whatever ratio works for you.

Although saving for retirement should take priority, setting aside even a small amount for college can help. For example, parents of a preschooler who save $100 per month for 15 years would have $24,609, assuming an average 4% return. Saving $200 per month in the same scenario would net $49,218.*

These aren’t staggering numbers, but you might be able to add to your savings over the years, and if nothing else, think of this sum as a down payment–many parents don’t save the full amount before college. Rather, they try to save as much as they can, then look for other ways to help pay the bills at college time. Like what?

file000195499258Loans, for one. Borrowing excessively isn’t prudent, but the federal government allows undergraduate students to borrow up to $27,000 in Stafford Loans over four years–a relatively reasonable amount–and these loans come with an income-based repayment option down the road.

In addition, your child can apply for merit scholarships at the colleges he or she is applying to, and may be eligible for need-based college grants. And there are other ways to lower costs–like attending State U over Private U, living at home, graduating in three years instead of four, earning credits through MOOCs (massive open online courses), working during college, or maybe not attending college right away or even at all.

In fact, last summer, a senior vice president at Google responsible for hiring practices at the company noted that 14% of some teams included people who never went to college, but who nevertheless possessed the problem solving, leadership, intellectual humility, and creative skills Google is looking for (“In Head-Hunting, Big Data May Not Be Such a Big Deal,” New York Times, June 19, 2013). One more reason to put a check in the retirement column.

Second Careers: Resources for People Returning to College

You’ve decided to go back to school–congratulations! As it turns out, you’re not alone. According to the National Center for Education Statistics, the number of full-time students age 65 and over in degree-granting schools increased 36% between 2007 and 2009, while the number of 50- to 64-year-old full-time students increased 42%.

OxfordceremonyHeading back to college later in life can be both fulfilling and fruitful; however, the many decisions involved–from choosing the right school and determining a course of study to budgeting for the various costs–can be overwhelming. Fortunately, a number of resources exist for older adults seeking information about higher education devoted to their needs.

A few years ago, the American Association for Community Colleges launched the Plus 50 Initiative, which encourages community colleges across the country to develop programs for those age 50 and older. The website provides links to college search tools and financial aid tips.

Encore.org is a nonprofit organization devoted to helping baby boomers seeking new careers that are dedicated to serving the greater good. Among the many programs the organization runs is the Encore College Initiative, which provides resources for individuals looking for specific college-level programs for older adults.

Elderhostel, Inc., a nonprofit organization that provides educational and travel opportunities for retirees, helps support Lifelong Learning Institutes. Through these locally run membership organizations, participants select courses based on needs, interests, and the simple desire to learn. Most LLIs are sponsored by local colleges and universities, and offer a wide variety of programs.

Finally, many colleges and universities offer discounts–and, in some cases, even free tuition–for students over age 65. Consider starting your search by calling a local institute of higher learning and asking about special programs for seniors

Is College Debt the Next Bubble?

What might a 23-year-old recent college graduate, a 45-year-old entrepreneur, and a 60-year-old pre-retiree have in common financially? They may all be hobbled by student loan debt. According to financial aid expert Mark Kantrowitz, the student loan “debt clock” reached the $1 trillion milestone last year. And even as Americans have reduced their credit card debt over the past few years, student loan debt has continued to climb–both for students and for parents borrowing on their behalf.

A perfect storm
college_debtThe last few years have stirred up the perfect storm for student loan debt: soaring college costs, stagnating incomes, declining home values, rising unemployment (particularly for young adults), and increasing exhortations about the importance of a college degree–all of which have led to an increase in borrowing to pay for college. According to the Federal Reserve Bank of New York, as of 2011, there were approximately 37 million student loan borrowers with outstanding loans. And from 2004 through 2012, the number of student loan borrowers increased by 70%.3

With total costs at four-year private colleges pushing $250,000, the maximum borrowing limit for dependent undergraduate students of $31,000 for federal Stafford Loans (the most popular type of federal student loan) hardly makes a dent, leading many families to turn to additional borrowing, most commonly: (1) private student loans, which parents typically must cosign, leaving them on the hook later if their child can’t repay; and/or (2) federal PLUS Loans, where parents with good credit histories can generally borrow the full remaining cost of their child’s undergraduate education from Uncle Sam.

The ripple effect
17620594881The implications of student loan debt are ominous–both for students and the economy as a whole. Students who borrow too much are often forced to delay life events that traditionally have marked the transition into adulthood, such as living on their own, getting married, and having children. According to the U.S. Census Bureau, there has been a marked increase in the number of young adults between the ages of 25 and 34 living at home with their parents–19% of men and 10% of women in 2011 (up from 14% and 8%, respectively, in 2005).4 This demographic group often finds themselves trapped: with a greater percentage of their salary going to student loan payments, many young adults are unable to amass a down payment for a home or even qualify for a mortgage.

And it’s not just young people who are having problems managing their student loan debt. Borrowers who extended their student loan payments beyond the traditional 10-year repayment period, postponed their loans through repeated deferments, or took out more loans to attend graduate school may discover that their student loans are now competing with the need to save for their own children’s college education. And parents who cosigned private student loans and/or took out federal PLUS Loans to help pay for their children’s education may find themselves saddled with education debt just as they reach their retirement years.

There’s evidence that major cracks are starting to appear. According to the Federal Reserve Bank of New York, as of 2012, 17% of the 37 million student loan borrowers with outstanding balances had loans at least 90 days past due–the official definition of “delinquent.”5 Unfortunately, student loan debt is the only type of consumer debt that generally can’t be discharged in bankruptcy, and in a classic catch-22, defaulting on a student loan can ruin a borrower’s credit–and chances of landing a job.

Tools to help
The federal government has made a big push in recent years to help families research college costs and borrowers repay student loans. For example, net price calculators, which give students an estimate of how much grant aid they’ll likely be eligible for based on their individual financial and academic profiles, are now required on all college websites. The government also expanded its income-based repayment (IBR) program last year for federal student loans (called Pay As You Earn)–monthly payments are now limited to 10% of a borrower’s discretionary income, and all debt is generally forgiven after 20 years of on-time payments. (Private student loans don’t have an equivalent repayment option.)

Families are taking a much more active role, too. Increasingly, they are researching majors, job prospects, and salary ranges, as well as comparing out-of-pocket costs and job placement results at different schools to determine a college’s return on investment (ROI). For example, parents might find that, with similar majors and job placement success but widely disparate costs, State U has a better ROI than Private U. At the end of the day, it’s up to parents to make sure that their children–and they–don’t borrow too much for college. Otherwise, they may find themselves living under a big, black cloud.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

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