Along with accumulating money for retirement, saving for children’s education is a major concern for parents during their working years.
But what happens when those two priorities collide?
Student loan debt in the U.S. totals about $1.3 trillion.* Students took on much of this debt themselves, but more and more is the responsibility of students’ parents as the cost of college rises.
The average cost of tuition, fees and room and board at a public four-year, in-state university went from $2,551 in 1980-81 to $20,092 in 2016-17, according to The College Board. The average at private schools went from $5,594 to $45,365 during the same period.
The U.S. Department of Education reported that in 2016, about 3.3 million borrowers held $74.5 billion in parent PLUS loans to help pay for their children’s education – more than $20,000 per child.
Parents who take on college debt for their children may delay saving for retirement and/or considerably reduce how much they’re saving.
This can have serious impact in later years as parents reach retirement age and find their retirement accounts grossly underfunded.
Some parents are still paying off their children’s student loans in their retirement years. The U.S. Government Accountability Office said that in 2015, more than 210,000 people 65 and older had outstanding parent PLUS loans, and more than 25 percent of these borrowers defaulted. Thousands were having money taken out of their Social Security checks to pay back their parent PLUS loans.
I encourage my clients to focus on their retirement planning as their number one concern. If they do chose to borrow funds for their children’s education, I advise not borrowing more than can be paid off in 10 years or before retirement age, whichever comes first.
Kenneth A. Martin, CLU®, ChFC®, is a Financial Advisor in the Everence office in Ephrata, Pennsylvania.
* forbes.com, March 24, 2017