No parent wants to be the bad guy.
But as they try to figure out whether they should let their children say yes to college acceptances that have just arrived, parents may wonder if they dare give the go-ahead. For many families, the choice between an exciting yes or an excruciating no is a fraught decision. And if parents trust their gut, they may go wrong.
Most parents haven’t saved nearly enough to pay for college, which is understandable considering tuition, housing and food now average about $18,900 a year for students at in-state universities and $42,400 for private colleges, according to the College Board. Some are closer to $60,000.
That’s like paying for a $250,000 home in just four years.
Even before facing college costs, about 63 percent of parents said in a recent T. Rowe Price survey: “I feel guilty that I won’t be able to pay more for their college.” The majority was willing to take a chance on undermining their own retirement than to disappoint their children.
While saving enough for college is outside most parents’ ability, 52 percent said they were putting a higher-education fund ahead of saving for their own retirement. When it comes to borrowing for college, 52 percent of parents surveyed said they were willing to borrow $25,000 or more, with about 23 percent willing to borrow more than $75,000. Parents who struggled to pay off their own college education were the most intent on saving their children from the same fate.
“After experiencing the burden of student loans, I would not want my kids to experience the same thing,” 74 percent of parents told T. Rowe Price researchers. And 79 percent said, “I want my kids to worry about money less than I did while I was in college.”
This overarching feeling of responsibility can lead families astray.
A precept of financial planning is to put saving for retirement ahead of saving and paying for college education.
The reasoning: If parents can’t save enough for college, students can borrow through federal Stafford and Perkins student loans. They can then take 10 years or more to pay those loans back and parents, if inclined, can help with repayment, if able.
Most importantly, if a person with federal student loans fails to earn enough after graduation to make full payments, the government can reduce payments until the student’s income increases. After 20 years, if the borrower has not earned enough to pay off the loans, the government can forgive the remainder.
Parents have no such advantages.
If they borrow using federal loans called Parent Plus Loans, they will be required to pay fully. And the loan interest rate for parents is high, 7.21 percent compared with 4.66 percent for a Stafford loan. Perkins federal loans also are more affordable.
Meanwhile, waiting until after a child’s college years to save for retirement often doesn’t do the job and planning to work longer fails. About half of current retirees were forced by health or layoffs to leave work early.
Assume a couple starts saving $5,000 a year in a 401(k) or IRA at 30 and continues the same practice until retirement age. If they earn 8 percent a year, on average they will have about $1.2 million by retirement at 68, giving them about $50,000 a year to live on, not including Social Security. But if they have saved only $100,000 in a 401(k) or IRA by age 48, and then start saving $5,000 every year after that, they will end up with only about $713,000 for retirement. That will give them about $28,500 a year, again not including Social Security.
When choosing among colleges for your children, consider the price tags and investigate the cost compared with how far along you are saving for retirement. Or try the Employee Benefit Research Institute’s ballpark estimate calculator at choosetosave.org/ballpark.
You should also see if child’s school of choice will match or provide aid closer to any better offers from other universities.
Lastly, set up a monthly payment plan rather than writing a $20,000 check.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune.