Over half of the parents who participated in a recent T. Rowe Price survey indicated they would rather withdraw money from their retirement account, delay retirement for a few years, or work an additional job than have their children take out student loans to pay for college. If you are in that group, please reconsider because sacrificing retirement savings to spare your children student loans is a big mistake. Here’s why:
- You cannot fund your retirement with borrowed money. While your children have the option to borrow money to finance a college education, you don’t have that luxury when it comes to financing your retirement; you will need savings. The vast majority of Americans have not saved enough for retirement. You cannot afford to tap your retirement savings to pay for your children’s college education.
- Your children will have forty years to pay back student loans and save for their retirement. Your children have their entire lifetime to build their fortunes; you have less than twenty years to secure your retirement.
- There are other ways to pay for college in addition to student loans and your retirement savings. Funding the costs of a college education is not an either/or proposition: student loans or your retirement savings. Your children can pay for part or all of their own college education with scholarship money, wages from part-time employment during the school year and full-time employment during the summer, by taking evening classes while working full-time, by delaying college to work full time and save for college expenses, and so on. See my post How to Graduate from College with Less Student Loan Debt for more ideas.
- Delaying retirement may not be an option. Recent surveys confirm that a significant percentage of American workers retire sooner than they had planned, usually due to health reasons or a layoff. You may not be able to work longer to compensate for the retirement savings you spend on your children’s education.
- Working a second job is easier said than done. The rewards of working a second job will be far less than you imagine them to be; see my post The Hazards of Chasing Additional Income. If you are a professional, moonlighting will probably detract from your performance at your primary job. Do you really want to put your full-time job in jeopardy to earn a few extra bucks so your children can graduate from college free of student loan debt?
Your children will be the beneficiaries of their college degrees by way of increased earnings over their lifetime. Let them invest in themselves by financing their college education with scholarship money, their own earnings, and if necessary, student loans. You can help them avoid unreasonable student loan debt by encouraging them to make financially prudent decisions with regard to the cost of their higher education. I know from experience that if a child has a financial stake in her higher education, she will get more out of the college learning experience, because she will be motivated to put more into it. It’s her money on the line.
Plan ahead and save for your children’s college education
If you feel you must pay for part or all of your children’s college education, then make a plan to save for it along with your retirement. Start early and save aggressively. To successfully finance all or part of your children’s education as well as your own retirement, you will need to keep a lid on your standard of living so you have the money available to adequately fund college and retirement savings simultaneously. Use a 529 plan to accumulate college savings tax free.
Financing college with student loans is a good investment
Whatever course you take, don’t try to make up for lost time by raiding your retirement savings to avoid student loan debt for your children. You cannot afford it. Besides, repayment of student loans should not be viewed as a hardship. When done prudently, financing a college education with debt is a good investment. It is well worth the interest paid on a student loan to obtain a marketable college degree that will pay for itself many times over though an increase in earning capacity.
Average student loan debt for those graduating in 2014 was $ 28,400 about the price of a new, mid-sized automobile, less than the average cost of a wedding ($29, 858), and a whole lot more valuable. Your children can handle student loan debt and prosper with a little guidance from you.
K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages