How borrowing from your retirement accounts hurts everyone.
Are you on the hook for college tuition?
Just about everyone understands that it’s expensive. What many people don’t plan for, however, is how they’re going to pay for it once they’ve committed.
Where’s the money going to come from?
Did you know that people between the ages of 65 and 74 have almost six times the amount of student loan debt of similarly aged people from just 25-years ago? [1]
For those who are averse to debt, some elect to dip into their 401(k) to pay tuition, while others vow to delay their own retirements indefinitely; all to keep someone they care about from having to take out a student loan.
While these options (debt, loans from 401(k)s, delaying retirement) may sound admirable, these decisions are typically not sustainable. (For instance, a full 60% of people are forced to retire earlier than they’d planned.[2])
Make no mistake, be it your kin, the child of a dear friend who you promised to look after, or maybe someone you’re sponsoring through a non-profit, giving the gift of education is a wonderful thing.
But when the rising costs of college intersect with the ever-increasing challenge of funding a long retirement, the burden of both are drastically magnified.
These are complex issues that can be best resolved by planning and education.
Are you saving for retirement, but facing future college funding obligations? You’ve got to find ways to pay less while continuing to save money whenever and wherever you can. Here are four things you should consider.
1) Explore All Financial Aid and Discount Options
Through various university programs, nonprofits, or via the corporate route, tens of thousands of scholarships are awarded each year.
But if your prospective student doesn’t qualify, the next step may be to look at grants.
In 2016, on average, private and public school undergrads received $8,000 each in grants. [2]
This money is not only available it never has to be repaid. Go to www.collegegrant.net to start your search.
Next, ask the school to reduce its tuition.
Almost no one needed to do this 30-years ago when a semester of tuition on most college campuses was a few hundred dollars.[3] Times have changed and costs have skyrocketed. But, oddly, today’s college tuition bills read a little bit like a medical invoice: The numbers are shocking but they also seem arbitrary. Believe it or not, there’s actually room to negotiate.
To help lower the tuition for a loved one, you should:
- Appeal the financial aid package in person (have the number you can afford in mind)
- Engage the financial aid officer (be persistent) via phone and email
- Be ready to explain your financial situation in detail (why do you need a discount?)
- Be prepared to walk*
*Yes, colleges need to adhere to a bottom line, but the competition for students is fierce, and, cumulatively, enrollments have fallen 1.3% a year for three straight years.[4] Simply, they can’t afford to lose out on qualified students.
Lastly, there are work-study jobs. Many of the jobs available on campus come with an hourly wage and a substantial reduction in tuition. I have a friend whose child is assisting a professor in her degree program at the University of California, Berkeley, and who has received free tuition for the entire year for what amounts to a 10-hour weekly commitment.
2) Fund a 529 Savings Plan
If you’re committed to paying for college, don’t merely write a check or charge the tuition to your credit card. Instead, consider funding a 529 plan. (This is what I did for my children.)
Money in a 529 gets invested in mutual funds (or other investment products), very much like a 401(k) or IRA. All 50 states have at least one type of 529. And although contributions are not across-the-board tax deductible, as long as the money gets used for qualified higher education expenses, they offer a bevy of big benefits (such as both tax-free growth and tax-free withdrawals), and are set up in such a way that they need not impact a person’s qualification for financial aid (loans may still be available).
Also, you, the donor, remain in control of the money, which means it’s not a trust fund that the beneficiary can spend any way they like.
Lastly, the beneficiaries are flexible. You can change it if the child doesn’t go to college, or if there’s money left over. (You can even change the beneficiary to yourself if you decide to go back to school once you retire.)
3) Fund a 529 Tuition Plan
These plans actually allow you to “lock in” current tuition costs via pre-purchase. They are sponsored by each state, but if your student changes his mind late in the game and wants to go to college in, say, Texas, rather than Colorado, you can transfer the value of the account, or you can simply get a refund.
4) Prioritize Your Retirement First
Now, a little disclaimer: this isn’t going to help your child pay for college. But it may benefit them many years from now when you’re 85 and still financially independent.
I was alarmed when I read that 70% of parents will likely borrow against their retirement accounts to help pay for a child’s college education.[5]
I want to remind you that it’s not going to do anyone any good if you use 10 or 20% (or more) of your retirement savings to pay for a loved one’s degree.
If you don’t want to find yourself running out of money 15 years into a 25-year retirement, you have to prioritize.
Remember, even though we all want what’s best for those in our charge, if you’re in your 40s or 50s, or older, you only have so many years left to save. Conversely, people in their teens or 20s have decades out in front of them to pay off student loans.
It’s not easy. Student loans are a tough burden for recent college graduates. (With more than $1.3 trillion currently outstanding.[6]) And while of course you don’t want them to be saddled with debt, if you borrow from (or short) your retirement accounts, you are hurting yourself, not only by saving less today, but you’re also missing out on the compound growth that money will likely earn year after year into the future.
Conclusion
As bad as the student debt loads are, in terms of the urgency of the problem I would argue they come a distant second to underfunded retirements.
Again, young people with decades left in the workforce can and will dig themselves out of debt.
Because while you have options, you also have a limited amount of time.
If you’ve saved well, but are still facing the prospect of paying for college, or if you have yet to become a client of Hanson McClain and want an unbiased assessment of your financial situation, talk to one of our credentialed advisors today to learn what your options are.
[1] https://money.usnews.com/investing/articles/2016-09-14/how-to-save-for-retirement-while-paying-for-a-childs-college
[2] https://www.usatoday.com/story/money/2015/06/02/majority-of-americans-have-to-retire-sooner-than-theyd-planned/28371099/
[3] https://www.huffingtonpost.com/harlan-green/what-happened-to-tuition_b_10240514.html
[4] https://www.forbes.com/sites/teresaghilarducci/2018/03/09/lower-the-cost-of-college-part-1-how-to-negotiate-college-tuition/#38bcc1ec3d7f
[5] https://www.cnbc.com/id/100493353
[6] https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/#6f7891465dab
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