College Savings Mistakes to Avoid [What to Do Instead] - 401k Maneuver

College Savings Mistakes to Avoid [What to Do Instead]

Far too often, parents prioritize college savings over retirement savings.

While many believe they are doing the right thing helping their children avoid financial misery, they fail to realize that prioritizing college savings over retirement leads to more than one generation struggling financially.

It’s becoming more common for parents and grandparents to take out loans or draw from their retirement savings to pay for college.

Here’s the thing – as great as a college education may be, it is not the right choice for everyone.

40% of college students don’t finish school and earn their degree, and 30% of those are college freshmen dropping out before their sophomore year.¹

That means parents who prioritized college savings over retirement savings lost out on a big chunk of retirement income for little reason. 

James Royal, an analyst at Bankrate, explains, “For every single year you don’t invest and allow your money to compound, you’re costing yourself tens of thousands of dollars in the future.”²

We’ve talked before about the importance of putting on your oxygen mask first when it comes to saving for retirement, but today we are focusing on the reasons why college savings may prove harmful for many parents. 

Before we dive in, one quick note: We’re not advocating you shouldn’t pay for your child’s higher education. We just want you to have all the information before you make a decision.

The Danger in Prioritizing College Savings over Retirement

college savings

The numbers are alarming.

Education Data reports, “Among adults with student loan debt, 93% report borrowing to pay for their own education while 81% report borrowing to pay for a child’s or grandchild’s education.”³

According to Newsweek, “A stunning 22 percent of that $1.6 trillion in outstanding student debt, $336 billion in all, is held by people 50 and older, who typically borrowed to help pay for a child’s or grandchild’s higher education.”⁴

And, a July 2021 survey conducted by The Harris Poll on behalf of NerdWallet found the following⁵:

  • “Around 1 in 5 parents borrow to help pay for their child’s school, with 11% using PLUS loans” with “the median parent PLUS loan debt [being] $29,945.” 
  • “Nearly 1 in 3 parents (30%) with federal parent PLUS loans say if they could do it over, they’d ask their children to rethink their education plans so they wouldn’t have to take out the loans.”  
  • “22% of parent PLUS borrowers say they thought their children would take over their loan payments, but they haven’t yet.” 
  • “More than 1 in 4 parent PLUS borrowers (26%) say they won’t retire as expected due to their PLUS loans.”

No one wants to retire in debt. It means you have less money to live on in your golden years.

Unfortunately, it seems apparent that many American parents are doing just this for the sake of college savings.

Let’s look at specific reasons why it is dangerous to prioritize college savings over retirement.

You May Default on Loans

college savings

Sadly, many parent PLUS borrowers find they cannot make steep college payments, resulting in many parents defaulting on their loans.

According to the NerdWallet survey, “One in 5 parent PLUS borrowers (20%) say they were able to afford the loan payments initially, but no longer can.”⁶

When they no longer can afford the loan payments, they default.

Newsweek reports, “Nearly one in 10 parents default or are seriously late with payments within just two years of their child leaving school. That parent default and delinquency rate hit 20 percent or more at over 150 schools and at least 30 to 40 percent at dozens of institutions.”⁷

Defaulting on a loan may significantly hurt your financial standing in your retirement years.

You May Be Forced to Keep Working in Retirement Years

college savings

Consider this true story. 

Ted Newman of Columbus, Ohio, a retired state government employee, says, “I have been working full-time for the last 8 years since retiring, and my wife also. Her yearly salary went almost completely to pay student debt and I worked to have extras for the home.”⁸

Their daughter’s tuition is the student debt they are working so hard to pay in their retirement years. 

Even if you do not take out a loan to pay for your kid’s college, you may still find yourself in the same position if you prioritize college savings and not retirement. 

Because if you haven’t saved enough, you may be forced to continue working.

Your Retirement Lifestyle May Not Be What You Wanted

college savings

According to Senior Living, these are the most common retirement goals: 

  • Traveling 62%
  • More time with friends and family 57%
  • New hobbies 48%⁹

If you prioritize college savings over retirement, it may be unlikely that you’ll be able to travel much or golf every day. 

Not only will these retirement dreams go up in smoke, but you may also have to make lifestyle changes.

For instance, many retirees discover they have to live a bit smaller during their retirement years. 

They downsize their homes, eat out less, and shop at bargain stores because they can no longer afford to live the way they did when they received a salary.

Loan Forgiveness May Not Come

college savings

Some parents take out loans for college tuition for their children because they hope that the administration will grant student loan forgiveness.

However, even if the administration grants student loan forgiveness, this may not apply to parent loans – even parent PLUS loans for college debt.

You May Outlive Your Retirement Savings

college savings

We are living longer. And most of us aren’t saving enough to cover the costs of a lengthy retirement.

Merrill Lynch explains, “It also creates the very real possibility that you might outlive your retirement assets — especially when 28% of people underestimate their own likely life span by five years or more.”¹⁰

Let’s say you retire early at 60. You may not have enough to last until you are 80 years old.

Kiplinger reports, “If you plan to retire in New York, a million-dollar nest egg would only last you 16 years and 7 months assuming you spent a modest $5,000 per month.”¹¹

You May Not Be Able to Cover Costs of Emergencies

college savings

If you focus on college savings instead of prioritizing retirement, you may not have the funds needed to cover emergencies.

Healthcare costs continue to rise, but so do natural disasters.

Will you be able to afford emergency home repairs?

Dental care is also a costly and necessary emergency expense for many senior citizens.

Does the money you are saving for college cut into the emergency savings you need for your retirement years?

You May Wind Up Burdening Your Kids

college savings

Quite possibly the biggest danger of prioritizing college savings over retirement is having your plan backfire.

While you likely have the best intentions of helping your child get out of college debt-free, it won’t be appreciated if your child has to spend his hard-earned money to take care of your bills in your retirement years.

Watch this video for tips to help you tackle the difficult college money talk with your kids.

Plan for College Savings without Neglecting Retirement

college savings

The good news is that you can save for college and retirement. It doesn’t have to be one or the other. 

The key is to contribute more to retirement. The best way to do so is to start saving for college and retirement as early as possible.

If you start saving for college when your little one is born, you won’t feel as pressured to cut back funding retirement.

If you start saving for retirement early in your career, it will have even more time to grow, which will allow you to help your child with college without feeling as stressed.

[Related Read: Saving for Retirement vs. College: Which Is the Best Choice?]

Ways to Save for College

college savings

Another dangerous choice parents make regarding college savings is assuming it is all their responsibility. It isn’t.

Unlike retirement, there are loans, scholarships, and grants available.

In addition, many students participate in work-study programs, which allow students to earn money to pay for their education.

Here are 4 additional ways to save for college:

#1 529 Plans

college savings

If you want to help your child pay for college, consider a college savings 529 plan.

Money in a 529 plan grows tax-free, and it can also be withdrawn tax-free when used for educational purchases.

Plus, you can ask family and friends for gifts of contributions to your child’s 529 plan (it’s allowed).

#2 Prepaid Tuition Plans

college savings

There are also state-sponsored prepaid tuition plans that allow you to contribute a lump sum or regularly contribute to an account to pay for college in the same state where the account was opened at the current rates.

Currently, only 9 states offer prepaid tuition plans.

It’s important to note that the student must attend an eligible college or university within the same state where the account was opened, and the account must be opened while the child is 15 years old or younger.

#3 UGMA Accounts (Uniform Gift to Minors Act)

college savings

The Uniform Gift to Minors Act allows individuals to gift or transfer assets to children in place of setting up a trust fund. 

Unlike other financial gifts, UGMA does not require a gift tax up to a certain amount. Anyone can contribute to UGMA accounts once the account is set up, and there are no contribution limits.

An adult custodian manages a UGMA account until the child reaches a certain age (this varies state by state, but is generally between 18 and 21), and the adult custodian can manage the financial assets in the account.

It’s important to note that since UGMA are assets, they may decrease federal financial aid eligibility.

#4 Roth IRA

college savings

A Roth IRA can be used as a college savings vehicle because qualified education expenses may be withdrawn tax-free and penalty-free. The money must be used for higher education expenses such as tuition, books, supplies, and required equipment.

We regularly post videos to prepare you for an abundant life in retirement. Check us out on YouTube.

Watch Videos

Sources:

  1. https://educationdata.org/college-dropout-rates
  2. https://www.cnbc.com/2022/02/01/saving-less-for-retirement-now-may-cost-you-tens-of-thousands-later.html
  3. https://educationdata.org/student-loan-debt-statistics
  4. https://www.newsweek.com/2021/07/30/parent-loans-fraught-peril-default-rates-hit-20-30-percent-many-colleges-1610943.html
  5. https://www.nerdwallet.com/article/loans/student-loans/parents-with-student-debt-want-a-do-over
  6. https://www.nerdwallet.com/article/loans/student-loans/parents-with-student-debt-want-a-do-over
  7. https://www.newsweek.com/2021/07/30/parent-loans-fraught-peril-default-rates-hit-20-30-percent-many-colleges-1610943.html
  8. https://www.theguardian.com/money/2021/dec/13/americans-retire-work-social-security
  9. https://www.seniorliving.org/research/retirement-statistics/
  10. https://www.ml.com/articles/big-retirement-risks-and-how-to-prepare-for-them.html
  11. https://www.kiplinger.com/article/retirement/t042-c032-s014-parents-do-you-save-for-college-or-for-retirement.html
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