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You Can Borrow Money for College, but Not for Retirement

Last year my closest friends and family happily welcomed three healthy baby boys.  With that came a slew of financial questions that needed answering, the most common of which was pertaining to college savings accounts.

With the rising costs of college and average student loan debt, understandably parents are feeling the stress and need for saving for their children’s future.  According to a government data analysis produced by Edvisors, the class of 2014 graduated with an average student loan debt of $33,000 which was an increase of $3,000 from 2013.  While the need is certainly there to help with college funding, so is the growing responsibility for the next generation of parents to be saving for their own retirement.

We have all heard the headlines around Social Security being underfunded and that benefits could be reduced by up to 25% in 2033.  This directly affects the next generation of parents in that the bulk of their income needed when they retire will have to come from retirement assets or other savings accounts.  So what is the solution?

Finding the right balance in your financial goals can be difficult and unfortunately there isn’t one right answer.   We all have different circumstances and priorities but here are some things to remember when evaluating your current situation.

–    If eligible, participating in your employer sponsored retirement plan can have both tax advantages as well as matching contributions from your employer.  If your employer does have a match, ensure that you’re at least meeting the minimum to receive their contribution.

–    Both Traditional and Roth IRAs allow withdrawals for qualified college education expenses before your 59 ½ without incurring a 10% penalty.  A Roth IRA can be especially beneficial as it is also a great bucket to have in retirement if you don’t need the funds to supplement education costs.  You contribute after-tax money, allow it to grow tax-deferred and withdrawals are also tax-free.  There are income eligibility limits, so check IRS guidelines or with your accountant to see if this would be a suitable option for you.

–    Currently retirement assets do not need to be reported when applying for federal student aid.  However, it’s important to remember that if you do choose to tap your retirement accounts to help pay for college that the withdrawal will increase the following years’ EFC (Expected Family Contribution) as the money will be counted as income in the year taken.  This can lower the need for financial aid, so just make sure that you do some planning before making any withdrawals.

Although I’ve stressed the need for prioritizing your own retirement, it is still a good idea to explore education funding vehicles such as 529 Plans.  Even if you’re unable to contribute to these accounts on a regular basis, by at least having one open you can add part of your bonus as well as  any cash gifts received for your child’s birthdays or other holidays.  Conveniently, family and friends can also send a check directly to the plan provider as long as they have the account number detailed on the check.

Remember that a combination of grants, scholarships and student loans are also available to help pay for college.  Sadly when we get to retirement, those resources can’t help us if we haven’t saved enough for ourselves.  We would rather you have the option to help your children pay off their student debt as much as you can in retirement, than to not be able to retire.

Megan Logee, ChFC® serves as Senior Financial Advisor at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at mlogee@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Megan’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.