Kids’ College or Own Retirement? That’s the Question
By Deborah Jeanne Sergeant
Some parents may think that funding their children’s college education is the most important step to take in their finances after paying off debt; however, if that means sacrificing saving for retirement, the plan can dramatically backfire.
Bryce Carey, partner and certified financial planner for NorthLanding Financial Partner, LLC in Rochester, compares this conundrum to directions flight attendants give passengers before takeoff. If the plane’s oxygen masks descend during flight, “put on your oxygen mask before helping others,” Carey said. “We always help our clients plan for their retirement first and foremost because there’s often the opportunity to apply for loans for college. If a person cannot work any longer, there’s often no safety net other than Social Security.”
Parents who help their children by depositing in accounts in the child’s name can hinder their ability to obtain low-interest loans and grants.
One alternative is the 529 plan, which earmarks funds for higher education and allows contributions to accumulate tax-free. If the child doesn’t end up going to college, owners of these accounts can change its beneficiary to another child or family member, even themselves — to pay for higher education without suffering the 10 percent penalty and taxes on gains.
Parents should work with their college-aged children to lower the cost of their educational needs. Attending a renowned college doesn’t guarantee a fulfilling career, but it does guarantee a hefty tab.
Scott Klatt, certified financial planner practitioner, certified college planning specialist and partner at NorthLanding Financial Partner, said that his oldest son felt uncertain about his career path, so he attended Monroe Community College for two years. Opting for a less expensive, nearby school like MCC can help families save money while the student decides the next step. Commuting from home also spares them room and board expenses.
Many high school students feel pressured to attend a prestigious college; however, Klatt said that a community college costs nearly 50 percent less than many large, well-known colleges.
Klatt’s son also backpacked through Europe one summer for personal growth and to discover what he wanted to do with his life. He is now studying resort management at Green Mountain College in Poultney, Vt.
Klatt added that a “gap year” between high school and college may also help students explore the work world and help them decide their next step.
Klatt wants more young people to consider whether they want to attend trade school or learn through mentoring.
Apprenticeship programs pay apprentices varying rates that usually increase as they gain experience. They also require classroom time. The New York Department of Labor lists registered apprentice opportunities at www.labor.ny.gov/apprenticeship/general/occupations.shtm.
Students should also take the right major. Changing midstream adds additional time to the college career. Klatt said that only 45 percent of students earning bachelor’s degrees graduate within four years and many of these are five-year students because they changed their major.
“If you add an additional semester, it could be another $15,000 to $20,000,” Klatt said.
He encourages parents to tell their children to earn good grades, which can help them obtain scholarships, and to talk about budgeting, not only for college but after their education is complete.
“Tell them, ‘If you graduate with $50,000 on debt, here’s what that looks like,” he said.
Klatt knows a young man who has close to half a million in educational debt through several loans. He is starting his first job at $50,000 annually.
“I don’t think he understood the financial ramifications of obtaining those loans,” Klatt said. “That’s one of my most extreme scenarios.”
Diana Apostolova, financial consultant with AXA Advisors in Rochester, said that setting aside money for retirement in a tax-free retirement account shouldn’t affect the child’s financial aid and student loan calculations.
Apostolova said that the ability to save 25 percent of income for retirement can indicate readiness to set additional money aside for college.
In addition to the 529 plan, she advises looking at permanent life insurance.
“The money grows tax-deferred and may be taken out tax-free,” Apostolova said. “The cons of using a life insurance is possibly paying higher costs for keeping the insurance in place but you can use the money for any purpose and avoid the 10 percent penalty that you’d pay in a 529 plan” for using funds outside the account’s permitted use.
This strategy gives families flexibility in case the child decides to start a business after an apprenticeship, for example.