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Don’t Let College Sticker Shock Derail Your Retirement Security

Pam Krueger  |  July 13, 2021

Stressed about funding your kid's college tuition and your own retirement? Here's how to financially prepare for both.

If you’re a parent who spends any time thinking about your finances, you’re probably repeating, over and over:

I must save as much as I can for retirement. But I also must be able to pay for my kids’ college education.

Ideally, these aren’t conflicting goals. You’re already contributing to a 401(k) plan or IRA. And you’ve set up 529 College Saving Plan accounts for your kids.

If by the time your kids are high school seniors you’ve saved enough to pay for their college costs and your retirement nest-egg is in good shape, give yourself a round of applause.

But chances are, like most parents, you won’t be in that boat. The earlier you realize this, the better prepared you’ll be to deal with college sticker shock.

The costs keep going up and up and up

Many parents don’t pay close attention to the college costs until their kids make a short list of their top school choices.

That’s where the price of higher education really hits home.

According to the College Board, the average annual cost of attendance for colleges in the 2020-2021 academic year was $54,000 for private schools, $26,820 for residents attending in-state public colleges and $43,280 for students going to out-of-state public schools.

If you think that’s a lot more expensive than when you went to school, you’re right.

The average cost of tuition and fee rose 1,200% between 1980 and 2020. For comparison, during that same period, the cumulative inflation rate was 236%.

Colleges cost roughly double every eight years. Which means if your kids are in elementary school today, private colleges might cost $100,000 or more per year (or $50,000 for in-state public schools) by the time they graduate high school. Unless you’re reasonably certain that your own income—or the amount you’re saving for college—will rise enough to cover these spiraling costs, you may have to look beyond your own net worth to fund your kids’ higher education.

Where will the money come from?

Don’t expect your high school senior to receive huge scholarships, grants and student loans to cover most of their annual college costs. The hard truth is that you’ll be on the hook for most of it. Why? Because it’s built into the math of the financial aid allocation process.

FAFSA—frustrating and unavoidable

If you won’t be able to pay for college, you’ll join the millions of parents who dread filling out the Free Application for Federal Student Aid (FAFSA®) each year.  This labor-intensive, time-consuming process requires you to disclose you and your children’s income, savings and investments.

You can usually start the FAFSA process on October 1 of each year, and it’s a good idea to get it done as soon as possible, even if your senior hasn’t started applying to schools. Why? Because colleges often deliver financial aid on a first-come, first-served basis. Completing your FAFSA earlier means your information can get into the hands of college admissions offices right away.

Colleges use FAFSA information and formulas to craft individual financial aid offers for students. These may include a combination of direct student loans, work study, and grants. (Scholarships are usually handled separately.) Whatever costs are left over fall under the category of the Effective Family Contribution, or EFC. It’s a euphemism for “This is how much you’ll have to pay out of pocket.”

How much? The average annual EFC for four-year colleges is $10,000 per year. But if yours is a middle or upper income family your EFC could be significantly higher. And the higher the EFC, the less financial aid your child is likely to receive.

Think about that. You might have to pay a total of $40,000 or more out of your own pocket for each child’s college education—and that’s if they’re going to be a freshman next year. Now imagine how high your EFC might climb if your son or daughter is just entering middle school.

If your kids are young, hopefully this will motivate you to invest as much as possible in 529 College Savings Plans for each of them so it’ll have time to grow. Your kids will never have to pay federal income taxes on earnings or on withdrawals used to pay for qualified higher educational expenses. (You may have to pay state taxes if you choose a 529 Plan not sponsored by your state.)

You may want to encourage your children’s grandparents to contribute as well. Each of them can contribute up to $15,000 per year to each of your kids’ 529 plan accounts without affecting their lifetime gift tax exemption.

Dealing with college funding shortfalls

If you already know that you won’t have the spare cash to pay for uncovered college on your own, this will give you a head start on making some tough financial choices. Will you need to drastically cut down on everyday expenses? Will you need to tap into your taxable investment accounts or drain your rainy-day fund? Or will you need to borrow the rest?

Never-ending college debt

Here’s a sad fact of life. Many parents end up borrowing money to help pay for their children’s college costs soon after they paid off their own student loans.

The most affordable educational loan options are Direct PLUS loans, which let parents borrow to cover some or all of their annual EFC. While interest rates are often lower than educational loans offered by banks, they aren’t cheap. For the 2021-2022 school year, the Direct PLUS interest rate is 6.28%. And that rate generally goes up each year.

Many parents also tap their home equity loans and lines of credit to help pay for college costs, since these loans often carry lower interest rates.

While borrowing to pay for college may seem like an attractive option, it’s important to understand its long-term impact on your financial security. For one thing, it will increase your debt-to-income ratio, which may lower your credit rating, making it harder for you to be approved for credit cards, mortgages or auto loans.

And, depending on how much you borrow, it may take decades for you to pay your balances. loans. If you’re still making substantial payments well into your 60s and 70s, you may have to delay your retirement or severely pare your living expenses to the bone at a time you’re hoping to enjoy their golden years.

Then again, draining your bank accounts or taxable investments to pay for college may leave you with less money for emergencies or for future major expenditures like a new vehicle or home renovations and repairs.

Parents do make many sacrifices for their children. But they shouldn’t have to sacrifice their own quality of life—either now or when they retire.

So what are the alternatives?

This will sound a bit harsh, but parents facing these tough financial choices may need to become a bit selfish. They’ll have to make their own future financial security a higher priority than ensuring that Johnny and Jenny get to go to the college of their choice.

Going to an Ivy League college or an out-of-state Division 1 public university may just not be in the cards. They may have to “settle” for a lower-choice school that offers them a scholarship and financial aid package that’s the least burdensome for everyone.

If they choose to go to a local college, they may have to live at home rather than pay for room and board. Or, they may want to earn an associate’s degree from a low-cost, two-year community college and then transfer the credits to a four-year school to complete their undergraduate education.

It’s also in line to ask your kids to put their own financial skin in the game. When they start high school let them know how much you’ll expect them to pay for college out of their own pockets. Hopefully this will motivate them to get part-time jobs and put aside a percentage of their earnings in a savings account. They may even want to take a gap year after graduation and work a full-time job to build their college nest-egg.

Professional help

The point is, you shouldn’t have to choose between sending your children to college and living the way you want to either before or during retirement.

But with so many financial pieces in play, and with so much emotion riding on these decisions, you may be better off working with a professional who can help you understand how everything fits together.

A fee-only, fiduciary financial planner can help you examine your entire financial picture and take you through different investing, saving and borrowing scenarios that can show you the potential impact of different college financing decisions.

Since they’re paid directly by you, rather than through commissions from the sale of investment or banking products, you can be assured that they’ll always act in your best interests and provide objective, fact-based analysis and advice without any sugar-coating.


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