Retirement will have to wait
A sizeable chunk of parents say they’re losing sleep over how to take care of college costs for their kids
Amy O’Donnell laughs when she says she’s working for her 21-year-old daughter Katherine. It strikes her funny because, while it’s not literally true, it’s no joke, either. O’Donnell, 64, is pushing away thoughts of retirement to help pay for college for her youngest child.
O’Donnell, a mom of three, is far from alone. A survey released this month by Baltimore-based T. Rowe Price Group found most parents prioritize funding their children’s education above their own retirement needs: 57 percent said they’d saved some money for their child’s education, while only 54 have set aside money for their retirement. Just 51 percent have an emergency fund, which financial experts call essential.
A sizeable chunk of parents, 42 percent, say they’re “losing sleep” over how to help their kids pay for college, compared to 28 percent in 2014, said Marty Allenbaugh, one of the financial firm’s senior marketers and a certified financial planner.
Meanwhile, the survey points out a “disconnect” between parents and kids when it comes to expectations of who is paying for higher education. It found 62 percent of children expect their parents to cover the cost of whatever school they want to attend, while only 35 percent of parents said they could cover most or all of college costs.
“That’s a big disconnect that points to lack of communication between parents and kids,” said Allenbaugh. “Seventy-one percent of parents are reluctant to discuss financial matters with their kids — some of them ‘extremely reluctant.’”
What to put off
Delaying retirement to help fund college is a realistic option, according to Allenbaugh — as long as retirement needs aren’t being ignored. “We feel that delaying retirement is a personal decision that an investor can decide to make. We feel more concern if they stop contributing for their retirement. We recommend that parents continue with retirement savings and make sure that is on track before they save for college.”
The reason, he noted, is more options exist to pay for college than for retirement, including student loans, scholarships, grants, jobs, military service and monetary gifts. One can adjust education’s price tag by choosing a less expensive college, he said.
Allenbaugh and his wife have a daughter starting college this month. “We are big believers in having structured weekly financial conversations between parents and kids, starting as early as age 5,” he said. “With older kids, parents need to have a parent-kid conversation about college, how we will pay for this, what’s our plan. Lack of communication is adding to stress levels.”
They also use and refer others to his company’s MoneyConfidentKids website.
Survey demographics
Each of the 1,086 households surveyed had at least one child between 8 and 14, so it was not comprised of very young parents; 58 percent were 35 to 50. They also tended to be educated, with more than half holding at least a bachelor’s degree. One-fifth of the parents still had their own student loans they were paying off — they owed an average of $27,000. Yet, nearly a quarter of parents still paying student loans were willing to borrow $100,000 or more to educate their kids. Nearly half were willing to borrow $25,000 or more.
To help with college costs, more than two-thirds of the parents said they’d be willing to get a second job. More than 60 percent said they feel bad they can’t do more, though more than 80 percent of parents believe “nearly all students graduate from college with student loans.” Nearly that many say they’re willing to delay retirement to help with higher education costs.
O’Donnell’s sentiment is the same. The graphic designer figures she’ll work until she’s 70 to help fund her daughter’s education at the University of Southern California.
She and her husband make too much money to allow her daughter to get grants, but there’s no way they could simply afford to pay for her education. “She doesn’t really have any money,” O’Donnell said. “She’s one of the kids who worked hard and did well and got in. But she’s taking out the maximum loans she can as a non-independent student. And we’re helping her.”
Adds O’Donnell, “I would retire right now if I didn’t have her college tuition and debt. But I have not touched my retirement savings. I just keep working. Thankfully, she’s going into her senior year, and I think she won’t have a crushing amount of debt.”
Socking it away
When it comes to saving for college, Allenbaugh said people always want to know how much is enough. T. Rowe Price recommends $300 a month for education starting at birth if one hopes for a significant contribution to the cost. Even $70 a month is better than nothing: Over 18 years, with a 6 percent return, that would be $25,000 toward college. If you had to borrow the $25,000, it would be easy to end up paying $35,000 because of interest, Allenbaugh said.
One of the most positive survey findings is 58 percent are saving something for their children’s college education, he said. And 78 percent of them have automated the process, so it happens consistently.
The federal government says Americans owe $1.4 trillion in student loans. The U.S. Department of Education says the average student loan debt is over $30,000. That’s nearly a third higher than it was seven years ago, adjusted for inflation.
Take a number
Among survey highlights: — 28 percent of parents in survey households have either their own or a child’s student loan debt, while 5 percent have both.
—Those with their own student debt are “significantly more likely to have credit card debt and payday loan debt than those who don’t owe for their education. They are also more likely to say they lose sleep worrying about college costs for their kids.”
— Men are more apt to put their kids’ education over their own retirement, compared to women. It crosses generations, with millennials, Gen X and baby boomers all putting money for school ahead of saving for retirement.
The College Board says the average cost of a four-year, instate college education in America is $80,000. In the survey, 65 percent of parents underestimated the expense, according to the report.
The survey also found some kids may be in for a nasty surprise: Two-thirds of kids believe their parents are saving for their college education, but for onefourth of those with that expectation, it’s not happening. And 61 percent of kids whose parents say they cannot cover the entire cost of college think their parents will be able to send them to whatever college the child wants to attend.