As I suggested in Part One of this series on your retirement plan and how college, such as the University of Phoenix fits in with that goal, we looked at the post college costs that we seldom expect. That might seem as if we were getting ahead of ourselves, discussing post college life prior to financing a single class, yet there are economic realities at both ends. Realities that if they aren’t addressed soon, preferably before a single dime is spent, can leave the conversation and the lack of having had it, financially crippling for both parties: the parents and the students.
In Sallie Mae’s annual review on how America finances higher education (downloadable pdf can be found here), some interesting and often obvious statistics surfaced in the paper. Folks who make less than $35,000 a year struggled. Applications for grants, scholarship and borrowing increased. And a surprisingly correlated percentage of those who were able to increase their income, cut spending or save more to finance their child’s college education (34%) thought it was okay to pursue academic stimulation (32%).
An Investment Held in High Regard
The belief that college is still an investment in the future was held in high esteem by both parents and students. But the truth of that assessment has come under some challenges of late as the reward for that education is less often financial and even productive as it was in decades past. In short, those that can afford college through years of disciplined savings are less likely to put pressure on what college can produce in terms of income after-the-fact in large part because the of the debt this education leaves the lower income families.
Even with the vast majority of lower income families applying for financial aid do so understanding the debt that will remain, those same families borrowed less, opting for a two-year college as opposed to traditional four-year institutions. While lower income families borrowed more and used grants, scholarships and other forms of financing to get their children into school, they still found a way to contribute almost $2850 per year from savings. Those making between $35k and $100k financed around $7149 from their own pockets, and those who made $100k or more used over $15k of their own money, the sources of those cash infusions was not always clear.
And as is the case with all borrowing, the more you have access to, the higher the likelihood you will spend more on the cost of college year-over-year. With only 15% of the families surveyed using 529 plans, 14% drawing down other types of savings, and 6% using their retirement plans to help defray costs. This sacrifice can be huge considering that over fifty percent suggested that they had made an agreement, in advance of making the decision to send their child to school to help pay for some, if not all of the costs afterwards. Some added the caveat that they would do so if their child ran into financial difficulty – but didn’t describe what that meant.
The more money you make, as you might expect, lowers your objection to the idea of student debt. But few parents calculate exactly how many different kinds of debt a student is likely to have. Credit cards, phone bills and creature comforts are largely paid for by the parents while the child is in attendance.
So we have the savings before the fact, which for lower income wage earners, comes at the exact time when fully funding retirement plans are crucial. Then, this group incurs the unexpected and possibly unplanned for expense of actually attending. Then, after-the fact, the unpaid loan balances and potential for low entry level pay for the newly hired student, if they find work at all, put these obligations back onto the parent. You can scrimp and save for college all you want, but it seems as though you can’t foretell all of the costs in total.
Plotting the Financial Impact of College
So how do you plan? We accept that if we earn less than $80k a year, we should invest in the child before age 18. This comes with a cost as well but this sort of pre-college investments usually costs less. It also allows them a higher chance of receiving free money prior to attending. Another upside of this is the pre-college resume that you build. Colleges remain interested in well-rounded students and this might prove to be a better investment than using a 529 plan (at the exclusion of your own retirement plan).
This may fly in the face of the rosy perspective you have for your child’s future as most parents and their offspring have high expectations for what a college degree can provide. But the chances that parents will forego their retirement income accumulation at the most critical time of their investment lives is worrisome and may be contributing to the bleak outlook for their retirement age.
If this under $80k group instead focused on their own retirement, the costs for college, in terms of help with student loan repayments might come at a time when they are better able to finance them. This could be much more critical in aiding your child’s successful launch and achieving the dreams you both have for their future.
The bottom line is that your retirement plan should take precedence over your willingness to pay for or save for your child’s education. Although interrupting any retirement investment plan is not a good idea, it is better done in the later years of the cycle rather than sacrificing in the early years. The decision is wholly yours and my opinion on how to provide for a future you need to invest for now as opposed to the easy target goals that kids provide.
But there are other reasons why you should consider you instead of them: they might not graduate and if they do, it might take far longer than your finances could accommodate. In an article examining the topic of who graduates, BrightHub reported that “According to a report issued by The Education Trust, a Washington-based nonprofit group, only 63 percent of students who enroll in a four-year university will earn a degree, and it will take them an average of six years to do so. The other 37 percent will either drop out of college before finishing or else flunk out of their programs.”
You should do three things: Plan for your retirement first and make financial sacrifices for your kids college education if you can. Make plans for the worst outcome and plan on it being expensive when or if it happens. Talk to your kids about the costs of loans and credit and how to control college costs and the agree ahead of time who pays for what and how and most importantly, your 401(k) (or other retirement plan) is not a payment option. sacrifices they will have to make.
Related posts:
- Retirement Planning and Paying for College: Should You do Both? Part One
- College, Money and Retirement Planning: An Uneasy Financial Marriage
- Is College Debt Worth It?
- The Flip Side of Retirement Planning and Living Longer: Paying for College
- Student Debt, Your Retirement Plan and Tough Decisions made Young
Retirement Planning and Paying for College: Should You do Both? Part Two
As I suggested in Part One of this series on your retirement plan and how college, such as the University of Phoenix fits in with that goal, we looked at the post college costs that we seldom expect. That might seem as if we were getting ahead of ourselves, discussing post college life prior to financing a single class, yet there are economic realities at both ends. Realities that if they aren’t addressed soon, preferably before a single dime is spent, can leave the conversation and the lack of having had it, financially crippling for both parties: the parents and the students.
An Investment Held in High Regard
The belief that college is still an investment in the future was held in high esteem by both parents and students. But the truth of that assessment has come under some challenges of late as the reward for that education is less often financial and even productive as it was in decades past. In short, those that can afford college through years of disciplined savings are less likely to put pressure on what college can produce in terms of income after-the-fact in large part because the of the debt this education leaves the lower income families.
Even with the vast majority of lower income families applying for financial aid do so understanding the debt that will remain, those same families borrowed less, opting for a two-year college as opposed to traditional four-year institutions. While lower income families borrowed more and used grants, scholarships and other forms of financing to get their children into school, they still found a way to contribute almost $2850 per year from savings. Those making between $35k and $100k financed around $7149 from their own pockets, and those who made $100k or more used over $15k of their own money, the sources of those cash infusions was not always clear.
And as is the case with all borrowing, the more you have access to, the higher the likelihood you will spend more on the cost of college year-over-year. With only 15% of the families surveyed using 529 plans, 14% drawing down other types of savings, and 6% using their retirement plans to help defray costs. This sacrifice can be huge considering that over fifty percent suggested that they had made an agreement, in advance of making the decision to send their child to school to help pay for some, if not all of the costs afterwards. Some added the caveat that they would do so if their child ran into financial difficulty – but didn’t describe what that meant.
The more money you make, as you might expect, lowers your objection to the idea of student debt. But few parents calculate exactly how many different kinds of debt a student is likely to have. Credit cards, phone bills and creature comforts are largely paid for by the parents while the child is in attendance.
So we have the savings before the fact, which for lower income wage earners, comes at the exact time when fully funding retirement plans are crucial. Then, this group incurs the unexpected and possibly unplanned for expense of actually attending. Then, after-the fact, the unpaid loan balances and potential for low entry level pay for the newly hired student, if they find work at all, put these obligations back onto the parent. You can scrimp and save for college all you want, but it seems as though you can’t foretell all of the costs in total.
Plotting the Financial Impact of College
So how do you plan? We accept that if we earn less than $80k a year, we should invest in the child before age 18. This comes with a cost as well but this sort of pre-college investments usually costs less. It also allows them a higher chance of receiving free money prior to attending. Another upside of this is the pre-college resume that you build. Colleges remain interested in well-rounded students and this might prove to be a better investment than using a 529 plan (at the exclusion of your own retirement plan).
This may fly in the face of the rosy perspective you have for your child’s future as most parents and their offspring have high expectations for what a college degree can provide. But the chances that parents will forego their retirement income accumulation at the most critical time of their investment lives is worrisome and may be contributing to the bleak outlook for their retirement age.
If this under $80k group instead focused on their own retirement, the costs for college, in terms of help with student loan repayments might come at a time when they are better able to finance them. This could be much more critical in aiding your child’s successful launch and achieving the dreams you both have for their future.
The bottom line is that your retirement plan should take precedence over your willingness to pay for or save for your child’s education. Although interrupting any retirement investment plan is not a good idea, it is better done in the later years of the cycle rather than sacrificing in the early years. The decision is wholly yours and my opinion on how to provide for a future you need to invest for now as opposed to the easy target goals that kids provide.
But there are other reasons why you should consider you instead of them: they might not graduate and if they do, it might take far longer than your finances could accommodate. In an article examining the topic of who graduates, BrightHub reported that “According to a report issued by The Education Trust, a Washington-based nonprofit group, only 63 percent of students who enroll in a four-year university will earn a degree, and it will take them an average of six years to do so. The other 37 percent will either drop out of college before finishing or else flunk out of their programs.”
You should do three things: Plan for your retirement first and make financial sacrifices for your kids college education if you can. Make plans for the worst outcome and plan on it being expensive when or if it happens. Talk to your kids about the costs of loans and credit and how to control college costs and the agree ahead of time who pays for what and how and most importantly, your 401(k) (or other retirement plan) is not a payment option. sacrifices they will have to make.
Related posts: