Saving for College or Retirement
It used to be parents would help out their children with college costs. They would spend their savings, sell stock, downsize their homes or take out loans to help their children pay the costs. This is still true today.
The new trend that disturbs me greatly though is parents taking out loans to pay for their child’s education as early as kindergarten! It’s unbelievable to me.
According to a news article I read on Smartmoney.com more and more parents are taking on debt so that their children can attend prestigious, private schools. Your Tuition Solution, one of the largest lenders of pre-college student loans, says demand from families seeking loans is up ten percent this year from last year. The company expects funding to rise to $20 million for the 2012-13 school term.
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Even former lenders are reentering the market because of the increased demand. First Marblehead, another lender of pre-college student loans, reignited their student loan division, after seeing demand go up in the last few years.
Why do I find the idea of parents taking out loans for their toddlers and pre-teens so unbelievable? Because it makes me wonder if these parents didn’t save enough to pay for elementary school for their child are they not saving enough for their retirement either?
I think some parents forget that they can’t borrow money to fund their retirement. Whatever money you have at age 67 is it. If it’s not enough, you have to keep on working…or move in with your kids. Maybe that’s what parents are hoping for? If they send their kids to super expensive private schools, then their kids will make enough money as adults so they can sleep on their couch.
I don’t know about you but I don’t want to depend on my kids in my old age. I want to be self-sufficient. Some parents might call me cold-hearted by choosing to max out my retirement accounts before I fund the education accounts for my children. But I want to show you why putting myself first is actually a mutually beneficial decision.
Students have many ways to pay for or borrow for school, retirees don’t. Loans for students offer some of the best interest rates and flexible repayment plans. Many lenders will lower the interest rate on a student loan by one quarter percentage point if they allow the monthly payments to be automatically debited from their accounts.
On top of that, students can deduct up to $2,500 a year in interest from their student loans if their modified adjusted gross income is less than $70,000 if their single or less than $145,000 if their married, filing jointly. This is usually a pretty easy qualification to meet in the first few years after graduation.
No parent wants to saddle their child with debt just as they enter adulthood. There are ways you can reduce the amount of loans your child takes out for college. Sending your child to a more affordable community college for the first two years is a good financial solution. If you are only able to save some money for college don’t fear. Community colleges offer easily transferable classes so they can get their general education classes out of the way cheaper. Afterwards, they can go to a more expensive college to get the remainder of the degree. The best part is their diploma will reflect the four year college’s name, not both schools.
It’s important to remember that college isn’t the last major expense in your child’s life. If you don’t pay for their college education, you can still help them pay for a wedding. In 2011 the average wedding cost $26,501, according to a study done by BRIDES magazine. Paying for that can help your child out immensely, plus it’s an event they’ll remember for the rest of their lives. You could also help them with a down payment on their first home, another figure that generally runs a person thousands of dollars. A typical down payment is twenty percent of a home loan. For a modest $200,000 home, that would require putting down $40,000. Helping them with this investment might help them as much as a college education down the road.
Saving for your retirement first will protect you, your future and could actually benefit your child if they do seek out financial aid. When assessing a child’s application for financial aid, officials take into account many financial accounts. One type of account they don’t consider is retirement savings. 401(k)’s and Roth IRA’s are not included in your child’s financial aid calculation. Even if you have a million bucks in your IRA, your child may still qualify for financial aid. So take full advantage of these accounts. You can withdraw money from an IRA penalty free to pay for certain higher education expenses. Maxing out your retirement accounts before squirreling away money for your child’s college education can actually allow you to do both! Besides, if all goes well in the future, you could help them pay off their student loans.
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