Published On: Wed, Jul 3rd, 2019

The Risky Financial Move That 56% of Americans Are Willing to Make

“Let your kids sink or swim,” is what many a retirement expert will tell you when you ask them about taking on student loans, especially when you are old. The advice might sound a bit cruel, but it is realistic. The costs of higher education are on an upward trajectory.

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Today, the average annual cost of boarding and tuition fees per student are around $21,370 for public institutions. If your teenage kid has their eyes set on a private college, you will need $48,410 annually to see them through.

With respective four-year costs of $85,000 and $195,000 for tuition and boarding fees, most parents are racking up debt for their kids. Data actually shows that 56% of all Americans are willing to commit financial suicide and pay off their children’s education costs. In addition, an average person is ready to take out up to a $31,000 loan to finance these costs.

Retirement cannot be funded by loans, but education can

Your philanthropy may not be misguided if you have a lot of cash left at the end of each month. However, it is a terrible idea if you must divert your retirement payments to service your young adult’s education debt.

Why? You will never have the time and opportunity to build up your retirement kitty that you have now. While your kid can foot their education bill through credit, you, on the other hand, cannot finance your retirement through loans taken from lenders those are hard to payoff. In some cases, reasonable interest rate options can be found with :

Some parents falsely believe that if they foot their children’s education costs, their children will, in turn, take care of them in their old age. After all, a good education will make them into well-heeled adults, who can afford a proper nursing home for you.We are talking one with a gym, massage therapists, a pool, good Wi-Fi, etc. 

However, personal finance advisors say that, if you are going to be financially dependent on your children in retirement, you will most likely be a difficult financial burden to them.

It is much easier for them to pay off a student loan than to finance you through your sunset years. To see how much of a risk American parents are putting themselves in, it pays to go through the statistics.

Statistics on parents financing their children’s college education:

  • Data from the Discover Student Loans survey shows that at least three in every five parents are expecting to assist in the repayment of their kid’s college costs. Most of them already have Parent PLUS Loans, while others have cosigned on the children’s loans.
  • At least 55% of all parents have over $40,000 as of education debt. They are legally shouldering this credit or are partially responsible for it. Most of these parents are also in the process of paying off their own education debt. More data shows that 23% owe more than $50,000 in education debt. This level of credit has put a lot of strain on their ability to not only fend for themselvesbut also to save towards retirement.
  • At least 39% of all parents, which is nearly 2 out every 5 parents, are paying off for their kid’s education debt on their own. Their children are not paying a single penny for the debt accrued. Another 20% say that their children partly pay for the grants while only 41% of all parents surveyed that have their children regularly contributing to these debt repayments.
  • More data from the Brookings Institution shows that at least 3.4 million parents have Parent PLUS loans, and they collectively owe over $90 billion. Each parent with this type of debt owes at least $25,600 per child in debt, and some parents have multiple loans to cover all their children. 

Disadvantages of parent-student debt:

  1. You might be forced to delay your retirement
    If you are going to take on more financial responsibilities, there has to be a trade-off. Often, this implies harder work to make all those repayments. However, you only have so many hours in a day to cover so many financial needs.  The only thing, therefore, you are left to do is to delay your retirement plan to cover the repayments. However, data shows that 30% of all parents took out a loan from their 401(k)s to pay off student debts.  Such a parent is, therefore, not only going to pay off penalties accrued from withdrawn retirement funds but will have fewer funds available by retirement age. These circumstances will keep most elderly parents at work for more years than they originally intended.
  2. You might mess up your debt-to-income ratio Loans taken raise the income-debt ratio makes it much harder to get more credit. This could hurt your chances of accessing funds for a home, car, or other assets. If you do access these credit lines, you might also be forced to fork out more in terms of interest.
  3. You might be forced to repay the debt
    The problem often is that most parents take on these loans loosely, even cosigning them through informal agreements with their children. This, consequently, leaves them to shoulder the responsibility for the debt repayment if their children cannot pay. 

So what should a parent do to assist their children through higher education while keeping their own necks out of debt?

  • Help your children to apply for federal student aid
    The Free Application for Federal Student Aid (FAFSA)  can go a long way in helping your children access grants. They can also access work-study programs that can give them an income to offset their study costs.
  • Look for scholarships and research grants
    If you look carefully, you will find tons of scholarships and grants that can foot those hefty tuition costs. If you are well organized, you could access multiple such facilities cutting down on your kids’ need to borrow more for education.
  • Make thorough college costs comparisons Take your children through the cost differences between public and private colleges. Let them know how important it is only to take on costs that will not endanger both of your financial futures. Empowered with the knowledge they will become more informed and make healthy decisions about student debt.
    If the public or private college costs are too high, advise them to start off at a community college. A two-year stint at an affordable community college gives them credits to a college to earn a degree more affordable.
  • Help them with the monthly payments when you can
    Avoiding a Parent PLUS loan doesn’t necessarily mean that you have to abandon your children entirely.  Let them take out the debt, and then you can step in for assistance while they search for a decent job. Do not, however tie yourself down with more credit just to help. 
  • Assist them financially through college
    Make your children’s life a bit easier by taking care of their health insurance via your own. Keep them on your mobile phone plan, too. Give them that old vehicle and pay the insurance premiums. Throw in a gas gift card as a bonus. These measures will ease the financial pressure your child will have in and after college as they pay off their debt and search for jobs.
  • Save both for your kid’s education needs and for your retirement Sock away funds for their 529s and save up more for your 401(k)s while you can. The contributions might not be hefty, but they will eventually compound to a respectable amount. What’s more, your children’s education will be more affordable if you start saving early enough.

The final word

Paying for your children’s education will affect your retirement savings. You and your children should, therefore, take on the challenge of getting a college education reasonably and affordably. This will assist you in staying debt free and save more for your sunset years. Make yours a parent-kid team and find creative ways to foot the education bill without placing a debt noose around both your necks.

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