No parent wants to be the spoiler of big college dreams.
But as a record number of parents are going into their 60s with crippling debt leftover from their children’s college years, financial planners are warning parents to resist the urge to help their children at any cost.
Comparing financial aid offers
“Parents are putting themselves into crisis,” said Byrke Sestok, a White Plains, New York, financial planner. Yet despite pleading with parents to resist, they load themselves up with college loans anyway: “Emotion wins out.”
People used to try to clear away debt before retiring so they could handle monthly expenses when paychecks stop. But the total student loan debt held by people over 60 is $66.7 billion and the average owed is $23,500, according to a 2017 report by the Consumer Financial Protection Bureau.
Sestok is currently working with a couple in their late 50s who will have about $250,000 in student loan debt when their kids finish college in a couple of years. He tried to head them off at the pass by getting them to send their younger daughter to a less expensive school, but they responded: “How can we tell our younger daughter to go to a state school when we didn’t do that with her sister?”
The parents will be paying about $3,000 a month for college loans until they are reach their 70s. With a mortgage, car payments and credit card debt, they will not be able to save any more for retirement for at least 10 more years.
They have only about $250,000 in a 401(k) at the moment, so with Social Security, that means they will have only about $65,000 to live on each year of retirement — far below their current lifestyle at $200,000.
“It’s a disaster and that assumes their health holds up and they can continue working into their 70s,” Sestok said.
When college bills arrive, many parents turn first to federal parent PLUS loans, which currently charge 7 percent interest. There is no limit on borrowing. Although there is a limited credit check, PLUS loans are provided without determining whether a family can afford to pay, said Rachel Fishman, deputy director of research for the New America Foundation.
Understanding college debt
Sestok said some clients have been able to refinance their PLUS loans with private companies after their kids graduate at about 4 percent recently. Still, he is advising parents now not to count on any loan with a variable rate because interest rates are rising.
While parent PLUS loans can be the easiest source of borrowing, parents also use other options. Some turn to home equity loans, which can have lower interest rates. However, under new tax laws, the interest will no longer be deductible. And with interest rates on the way up, the variable rates on these loans can be risky.
Parents also may take loans from their 401(k) accounts, up to $50,000. They can take IRA withdrawals for education purposes before age 59½ without penalty and also take principal out of Roth IRA accounts without penalty or tax.
But financial advisers continually warn parents to leave their IRAs and 401(k)s untouched for college. Most people have not saved enough for retirement in the first place and replenishing accounts so close to retirement age usually does not work.
The best bet is to avoid the debt in the first place and to do that, parents must figure out what they can actually afford before they sign loans. Scot Hanson, a Shoreview, Minnesota, financial planner, took on too much PLUS debt himself when his daughter started college a few years ago.
“I had gone through a divorce and was feeling guilty and wanted to do more for my child,” he said. “I was shocked when payments came due right away.”
Now, he quizzes parents considering expensive colleges: “Do you want to work for eight more years before retiring? Do you realize this college may cost you $200,000 or $300,000 that you could have had for retirement?”
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