Golden Years, Higher Ed: How to Pay for College in Retirement

Imagine you’re walking a tightrope, balancing retirement savings in one hand and your child’s college fund in the other. It’s a delicate act, isn’t it?

According to a recent survey, many parents consider a risky shift in this balance. A stunning 68% would consider dipping into their future funds to cover their child’s education costs. Among them, a staggering 74% of dads siphon funds from retirement savings. Mothers aren’t far behind – around 64% of them echo the sentiment.

These numbers present a concerning trend that may lead to compromising your financial security in the future.

Now, let’s consider some more statistics.

  • During the 2020-2021 academic year, private colleges demanded a hefty average of $41,411 per year.
  • Even at public institutions, tuition doesn’t come cheap, averaging $11,171 for in-state students and $26,809 for those from out of state.

Whether your child leans towards a private or public institution, a significant price tag looms ahead.

However, you shouldn’t let these figures sway you into depleting your retirement reserves. Instead, you need to explore other means to fund your child’s higher education. This post talks about 7 intelligent alternatives to pay off your children’s college loans without eating up your retirement funds. Read on!

Start with Setting Up a Budget

Understanding your financial landscape is key when it comes to saving for significant future expenditures like your child’s education. This process starts with developing a comprehensive understanding of your cash flow. You should keep track of every single cent that comes into and goes out of your pocket. This would include your fixed obligations and flexible spending.

You might have a small surplus or a little extra money each month that could be allocated toward your child’s college fund.

For example, if your monthly income is $4500, and you spend $3900 on living, you have an extra $600 in hand. Now, you can easily allocate $200 of this monthly surplus to your child’s college fund. This way, over 15 years, you could amass over $50,000 (assuming an average annual return of 5% from a college savings plan).

However, there could also be a situation where your income and expenses break even or you run into a deficit.

In such cases, it would be crucial to identify areas where you can reduce spending. This would free up some cash you could then set aside for your child’s education.

Remember, setting aside as little as $20 or $30 a month may not seem like much initially, but don’t underestimate the power of compound interest!

If your child is still several years away from college, every small amount you can regularly squirrel away will grow over time. This will eventually make a significant contribution to the total college fund.

Leverage 529

Establishing a 529 plan early on in your child’s life can be an excellent way to safeguard your retirement savings. These tailored savings accounts are designed specifically to accumulate funds for educational expenses. States, state agencies, or educational institutions sponsor the plans. Besides, they are authorized by Section 529 of the Internal Revenue Code.

A 529 plan allows your money to grow tax-free. You can use the fund to cover eligible education costs for your designated beneficiary.

The said cost may include college tuition, K-12 education, apprenticeship programs, and even student loan repayments. The best part is that a 529 plan won’t significantly affect your child’s eligibility for financial aid. This means they can still qualify for loans, federal aid, or other financial assistance programs.

Kickstarting a 529 plan when your child is still very young is a highly strategic way to make college savings more manageable.

Suppose you decide to set aside just $100 each month in a 529 plan, starting when your child is young and you continue to do so for 15 years. Assuming a conservative 6 percent annual return, your modest contributions could grow to over $29,000. The cherry on the cake is that about half of this amount would result from investment earnings, effectively multiplying your original contributions.

However, keep in mind that to enjoy the tax benefits, you need to use the funds in your 529 specifically for qualifying educational expenses.

Borrow Smartly

When it comes to paying for your kids’ college, federal student loans may look like an obvious alternative. However, understanding their limitations is crucial. Dependent students can only borrow approximately $27,000 in federal loans for the entire four-year college period.

This amount often falls short of covering all educational expenses.

For example, the estimated cost of attendance (tuition, fees, room, board, etc.) at your kid’s university is $40,000 per year. Therefore, you will have to pay a total of $160,000 for a four-year degree.

After maxing out the federal student loan limit, there will be a considerable gap of $133,000 ($160,000 minus $27,000).

To bridge this gap, you might think of applying for a Parent PLUS loan. However, these loans come with a higher interest rate, currently at 7.54%, and the interest starts accruing immediately.

If you were to borrow the entire $133,000 gap through a Parent PLUS loan, the amount you would owe could proliferate. If you aren’t able to start paying it off right away, it might become a significant financial burden, extending into your retirement years.

President Biden recently proposed a plan to forgive up to $20,000 in student loans for qualifying borrowers, including forgiveness of up to $10,000 in Parent PLUS loans. However, remember this provision applies only to loans taken out before June 30, 2022. New loans don’t qualify for this forgiveness.

You can make more strategic decisions when you’re aware of these federal student loan limits. You may consider more affordable options like in-state public schools or colleges that offer merit aid to students.

If you’re under significant financial pressure, you can also consider community colleges for the first couple of years. These institutions typically cost a fraction of public colleges. This way, you can significantly lower the overall cost of education.

Consider Home Equity

Let’s say you are a parent who owns a home worth $400,000. You’ve lived there for a while and have paid down your mortgage to the point where you only owe $200,000. This means you have $200,000 in equity in your home. Now your child is heading to college, and you need additional funds to cover the costs.

To accumulate their education cost, you can consider the following strategies.

  1. You can choose to cash out or refinance your mortgage. Given the current low-interest rates, you might be able to refinance your home for its full $400,000 value at a rate of around 3 percent.

After paying off your old loan of $200,000, you’d be left with $200,000 before closing costs to help pay for your kid’s college tuition. The interest you’d pay on this new mortgage may be tax-deductible, which could provide additional financial relief.

  1. Another option is to open a Home Equity Line of Credit (HELOC). In this case, the bank may allow you to borrow up to 85% of the appraised value of your home minus the amount you owe on your existing mortgage.

Given your home’s value of $400,000 and your existing $200,000 mortgage, this would potentially give you access to a line of credit of up to $140,000 ($400,000 x 85% – $200,000). This line of credit can be drawn on as needed to pay for college expenses, and you only pay interest on the funds you use.

Both of these alternatives allow you to tap into your home’s equity, turning it into a resource to help cover the costs of your child’s college education.

Turn to IRAs

Did you know that your IRA can double up as your secret college funding weapon? However,

the type of IRA you have, Roth or traditional, makes a big difference.

Roth IRAs are funded with money you’ve already paid taxes on and are pretty friendly for college funding. You can withdraw the full amount of your contributions without any penalties or fees.

The catch? This doesn’t apply to earnings — instead, it’s limited to the amount you’ve initially invested.

On the other hand, traditional IRAs are a bit more complex since they’re funded with pre-tax dollars. Moreover, early withdrawals usually ring the alarm for a 10% penalty. However, you can sidestep this penalty when using the money for college expenses.

Here’s where it gets a bit tricky, though. You need to provide proof to the IRS that your child is attending an eligible institution. That means you can’t take out the money to pay off any student loans once they’ve graduated.

Also, keep in mind that the amount you pull out can’t exceed the education-related expenses. For example, if the total cost for your kid’s college, including tuition, books, supplies, etc., costs $15,000 annually, you can’t withdraw more than this from your traditional IRA.

Create the ‘Ideal Scenario’

In an ideal world, you’d save for retirement and your child’s education simultaneously, kicking off as early as possible in your career. It’s always preferable to choose an affordable education option and steer clear of student loans. However, the reality isn’t always ideal.

So, what if you’re not in this perfect situation? Well, you can turn to a subsidized loan while keeping up with your retirement contributions.

If you’re contributing to a 401(k), quite often, there’s an employer match or profit share in the picture. This means when you contribute, your employer does too, boosting your retirement pot. If you stop contributing, usually your employer follows suit, so you’re essentially leaving money on the table.

Suppose your employer matches your 401(k) contributions up to 5% of your salary. If you’re earning $60,000 annually, that’s $3,000 of ‘free money’ added to your retirement savings annually. If you skip the 401(k) contribution, you’re simply saying no to an extra $3,000 a year.

However, on the flip side, if you enter retirement without sufficient savings in your 401(k), you may end up extending your work years more than you’d prefer. Worse yet, you may never achieve financial independence.

Put Money in Bonds

How about a slightly unconventional approach to kick-starting a college fund for your kids? Ever thought of savings bonds? You can get these digitally from the treasury, as they don’t come in paper anymore.

There’s a neat little benefit to these bonds when used for education. If you cash them in to pay for higher education expenses, barring room and board, you can keep this money off your annual gross income for tax purposes. The beauty of savings bonds lies in their simplicity and safety.

They come with a government guarantee, making them almost risk-free. However, they aren’t flawless. The interest they earn can be somewhat low. At present, individual Series EE savings bonds pull in an annual fixed rate of only 0.10%.

However, there’s a silver lining in the form of Series I savings bonds. They’re currently earning a composite rate of 9.62%, a part of which is indexed to inflation every six months. So, if you invest in a Series I bond today, in half a year, with the inflation adjustment, you might see a slight uptick in your bond’s value. Consequently, you can expect a better return than many low-risk investments.

Wrapping Up

To wrap things up, it’s vital to remember this golden rule – your children’s higher education costs shouldn’t cannibalize your retirement savings.

You can always consider the discussed alternatives to pay for your kids’ college while keeping your financial future secure. Whether it’s taking advantage of an IRA, maximizing employer-matched 401(k) contributions, or exploring the world of savings bonds, you have several avenues at your disposal. Each option comes with its own set of benefits and drawbacks, and it’s all about finding what works best for your unique financial landscape.

Frequently Asked Questions

If I can’t save for both retirement and my child’s college education simultaneously, which one should be a priority?

Although every situation is different, typically, it’s recommended to prioritize saving for retirement. There are various avenues available to help fund a college education, like grants and student loans. However, the options for funding retirement are more limited. That said, it’s crucial to discuss your situation with a financial advisor to find the best strategy.

Can I use my retirement funds to pay for my child’s education?

While it is technically possible to tap into your retirement funds for education expenses, it’s generally not recommended. Taking money out of your retirement accounts can lead to penalties, taxes, and less money for retirement. Instead, you should explore other financing options like scholarships, education-specific savings accounts, etc.

What is a 529 plan?

A 529 plan is a type of savings account that offers significant tax benefits for those aiming to save for educational expenses. Leveraging this flexible plan, you can set aside funds for universities, trade schools, vocational schools, and even K-12 private school tuition. You can set up a 529 plan to fund your children’s or other family members’ education.

Can I invest in an annuity plan for retirement?

Yes, investing in annuities is a great retirement plan. Here, you can choose to contribute either a lump sum amount to an insurance provider or regular monthly payments. In return, you’d get a regular stream of monthly payments (in the first case) or a lump sum amount at a specified date (in the second case).

What are some famous grants and scholarships for my child’s college in 2023?

Some US Federal government funded scholarships include the following:

  1. Dan L. Meisinger Sr. Memorial Learn To Fly Scholarship 2023
  2. Keith And Dorothy Mackay Postgraduate Travelling Scholarships 2023
  3. GenTex Scholarship 2023
  4. Asian Development Bank (ADB) – Japan Scholarship Program (JSP) 2023
  5. QuestBridge National College Match Scholarship 2023

Featured Image Credit: Andrew Piacquadio; Pexels: Thank You!

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