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Paying for College – A Retirement Funding Problem for Parents

  Next to buying a home, a child’s college tuition is probably the largest single expense a family will ever incur.

Today’s college education costs range from $11,000 to $23,000 per year at a state college and $26,000 to $52,000 or more at a private college. That amount is almost doable for most families.  It’s like buying and financing an average new car.  But here we’re essentially talking about buying one new car – EVERY YEAR your child is attending college.

That means the price tag is more like $44,000 to over $250,000 for a four-year education – for one child.  Add more if it takes your child five or six years to complete a degree – which is the average unfortunately.  If you have a couple of kids close together, that amount is unimaginable.

How will families meet this obligation?  Some families spend their life and retirement savings.  Others take out home equity loans which may burden their family budgets. Others take out personal loans or use credit cards to devastating effect on their cash flow and future plans.

There’s a better way to paying for college without going broke.  And that starts with a plan. What families need is a real financial plan before they take out any loans.  What they need is to speak with a qualified college financial planner to help them sort out the best way to finance a student’s college degree.

Cart Before the Horse

Too often families find that college application is staring them in the face.  How did that happen?  Weren’t you just changing diapers and now your little one is about ready to be an upper-classman in high school?

So with little time and thinking that there are few options, families will simply get a boatload of loans or stop contributing to their retirement accounts.  Others who are simply shell-shocked by the numbers resign themselves to this “reality” and simply avoid doing anything at all and accept their fate much like an ant stuck on a leaf about to float over the edge of a waterfall. Que sera, sera!

This approach is much like waking up one morning, getting into the car and then driving cross country.  No luggage. No reservations. No map.

Sure, this can be fun.  A friend of mine backpacked through Europe once with a vague idea of where he would go and what he would do when he got there. But even he didn’t leave home without a couple of guidebooks.

So getting loans without a plan in place or knowing how this will impact your personal long-term finances is like putting the cart before the horse.

Family Financing Commitment

Now a family may decide that they want to pay 100% of all college costs and not have their kids have any loans.  Others may decide they want to only pay a portion of it and leave the rest to the student as a way for them to have skin in the game.  Neither approach is right or wrong. It all depends on your family’s values.  Not everyone has the means or inclination to pay for college.

What matters is that parents make an informed decision though.  And trying to make this decision in a vacuum is a recipe for future financial strife. Without understanding the impact of how loans or selection of a particular school has on what kind of retirement Mom and Dad can expect is not going to help in the long run.

Ultimately, a family may decide that certain sacrifices make sense. But having a plan makes all the difference.  Case in point: A Greek immigrant family worked with a colleague.  They put four kids through college and ended up with no retirement accounts.  But what they had were two doctors, a lawyer and a school teacher in the family.  And a “pay it back retirement plan” where each child is now paying mom and dad a certain amount based on their own earned income.

Having the Talk

Some families have instilled in their kids the value of going to college. Some are more hands off.  Regardless of your approach, it is important to have the student involved in the process.  It is vital that the student understand the extent of the financial commitment that Mom and Dad intend to make as well as the impact that the school choice and financing method will have on current and future family finances.  It is also important that the student “buy in” to the process because if a student is not keen on a particular school or major then the likelihood increases that either he won’t finish the program or take longer and incur more debt.

Solutions will differ for each family.  Each solution is as personal as each family’s situation.  Ultimately what matters is having a plan in place so that college funding and retirement can be balanced in a way that works for each family.