Younger parents say “saving for college” is their top financial priority, according to the most recent College Savings Indicator study from Fidelity Investments. The sentiment is understandable, as many of those surveyed were likely scarred by their own high costs of college and lingering student loan payments.
But prioritizing future college costs for their children over saving for retirement could be a costly mistake. Here’s why younger moms and dads should put their own retirement needs ahead of potential college costs.
An Uncertain Expenditure
Most parents hope their children attend some form of higher education after high school. But a good share of kids don’t immediately head off to college.
The American Council on Education says that as of 2013 (the year with the most recent calculations), 65.9 percent of recent high school graduates subsequently enrolled in a two- or four-year higher education institution. In other words, a third of young adults didn’t have any college costs to cover. That figure marked the fourth straight annual decline since 2009, and the trend was reflected across the entire income spectrum.
Even when your clients are sure that their children will go to college, they shouldn’t stress out over the perceived future cost of an Ivy League education. The National Center for Education Statistics says that about four times as many students are enrolled in public higher education institutions than private schools. The majority of those students attending public institutions go to in-state schools that offer lower tuition expenses.
Better to Borrow?
Sure, repaying student loan principal and interest can be a nightmare for students and their families. But the reality may be less frightening than they imagine.
First, the payments may not be that bad. If a student leaves school owing a scary $35,000 with, say, a 6 percent interest rate, that balance could be repaid in 10 years by paying $388 per month—or about $5,000 per year.
Second, the interest on qualified student loans may be tax-deductible by up to $2,500 per year, even if the taxpayer doesn’t itemize.
The student loan payments and balances can even by reduced or eliminated by the borrower’s employer, a stint in certain public service occupations, or by an income-based repayment program.
Although student loans are readily available to most students, parents who don’t save enough will have a hard time borrowing to pay for unfunded retirement costs.