Saving for college now could help you avoid financial pitfalls later

From 2005 to 2015, the number of retirement-age Americans with outstanding college loans has quadrupled. More than 2.8 million people now fit into this category, according to a 2017 report by the Consumer Financial Protection Bureau.

A bar graph showing the number of retirement-age Americans with outstanding college loans has quadrupled from 2005 to 2015,

Far removed from their undergrad years, these borrowers (60 and older) are still saddled with bills for either their own or their children's or grandchildren's education which can affect their retirement goals and lifestyle.

Here are 3 ways to avoid having to use your retirement savings to pay off school loans:

1. Save now

You know it's cheaper to save than to borrow. But some parents, for a variety of reasons, don't get an early start. As time goes by and other more pressing bills pile up, opening a 529 account gets overlooked. But even if the kids are already in high school, it may not be too late to start saving.

If you haven't started, chances are you can still benefit from stashing away college funds. Here's why:

  • It adds up. Even if you only have $5,000 saved when your child is in middle school, you potentially still have time to turn that into a sizeable 529 account. Say you contribute another $200 a month to your 529 over a 6-year period. You could have close to $24,000* saved in time for freshman year. The average tuition for in-state residents at public schools in 2017–2018 (according to the College Board) was $9,970.*
  • You don't have to do it alone. When relatives ask for ideas for holiday, birthday, or graduation presents, recommend that they contribute to your child's 529 plan. Every little bit helps.
  • You can keep saving. Saving doesn't necessarily have to stop once your child leaves for college. You can continue to save for tuition until graduation.

2. Be sure that your student borrows first

In most cases, college loans should be the students' responsibility. They have time on their side. Of course, it's a good idea to make sure your children know what they're getting into and to help them make careful decisions about how much to borrow. They need to understand what it means to pay back a loan. They should also be sure to borrow from federal loans before considering other sources.

To help give them a clear picture, consider researching salaries in different fields. Then break down how much they might get paid monthly and what percentage of that would go toward a loan payment. This can help them make informed decisions on what career path to take and what school to choose. The Bureau of Labor Statistics publishes annual wage estimates. Just keep in mind that they're median wages; starting pay is generally lower.

Of the millions of older Americans with outstanding college debt, many are in that position because they either took out or cosigned private loans for their kids. Ultimately, they're now responsible for paying back some or all of that money. If a student is late with a payment, that impacts the cosigner's credit too. Fortunately federal loans do not require a cosigner.

3. Evaluate the real costs of college

Shopping for college is no different from shopping for any other high-value item. When buying a car or house, for example, you typically look hard at costs and compare values to get the best deal. You should do the same when choosing a college.

Consider factors such as:

  • The difference in price between a state school and a private institution. In-state tuition for a public school averages $9,970 a year versus $34,740 for a private 4-year college. In many cases, it's tough to beat the cost of an in-state public college**.
  • Financial aid. Grants and scholarships can bring down costs significantly. Many private schools offer savings to a majority of students. Be sure to compare the "net" price of tuition (which takes financial aid into account) instead of focusing solely on the sticker price.
  • Overall value. Some colleges may be worth the cost because their graduates often earn significantly higher salaries than graduates from other schools. Certain publications (such as U.S. News & World Report) rank schools by their lifetime value. This may or may not justify their higher price tags, but it's something to keep in mind.

As a parent, it's natural to want to give your children the best chance of a successful future, but be careful. You don't want to struggle through your retirement years. And, most likely, your kids don't want you to either.

 

*This hypothetical example assumes a 6% rate of return compounded annually.  It does not represent the return on any particular investment and the rate is not guaranteed. 

**Source: The College Board’s “Trends in College Pricing 2017”.

All investing is subject to risk, including the possible loss of money you invest.