As many of you read this you are getting ready to celebrate Christmas with your family and friends. I want to take this opportunity to wish you and yours a very Merry Christmas.
Despite the holidays, the world continues and in that regard I saw a new report that is disturbing. I’ve written in the past about student loans and how they can be a financial drag on students when they graduate. What this new report didn’t deal with is the amount of student debt that parents are incurring and how it affects them.
According to a new report, over three million parents have over $70 billion in outstanding loans for their children’s college education. A little more than half of these loans are in deferment, meaning no payments are currently due but interest continues to accrue. In fact, on many of these loans, interest is accruing at nearly eight percent. Unfortunately, the amount of student debt incurred by parents continues to grow and as a result many parents, in an effort to help their children, are creating for themselves a severe economic problem. Too many of these parents are either going into default on their loans or as many pay off the debt, they’re doing so at the cost of their retirement.
One of the hardest questions I deal with in counseling people deals with the balance between retirement and a child’s or grandchild’s college education. For many, they have to make some very tough decisions. Do they help finance their child’s college education or do they protect their retirement?
It is always difficult when you have to make a financial decision between two worthy causes, i.e., helping a child with their education or putting resources away for retirement. In those situations, all things being equal, I generally tell parents that their retirement comes first. Obviously, it’s not that I think a child’s college education is not important, because I think it is; I just believe when it comes to financing your retirement, there are a lot fewer options than there are in funding a child’s college education. When it comes to your retirement, if you don’t have the resources, your options are somewhat limited. If you have a house, you may be able to do a reverse mortgage or maybe if you are able, you can continue to work. On the other hand, when it comes to financing a college education, loans for the student are more available and there’s also other ways for them to reduce the cost of college, such as going to a community college for the first couple years or even going to a college closer to home so you don’t have additional room and board. The bottom line, you can be creative when it comes to financing a college education; unfortunately, you don’t have the same options when it comes to retirement.
I know for many parents this has got to be a heart-wrenching decision. I recognize that; however, what you also need to understand is that you will need significant resources in retirement and if you don’t have them it can cause problems for you and your family. For those parents who do have to make this decision, I recommend you have an adult conversation as soon as possible with your child to discuss the problem.
I wish I had a perfect solution to this problem, but I don’t. This is one of those times you have to think primarily of yourself. You should also keep in mind the problems that it will cause the family if you do not have the resources to retire.
Student debt across the country is now over a trillion dollars and growing. It is important that if you have outstanding debt on behalf of a student, you look for ways to reduce the debt. After all, for those of you with interest accruing at nearly eight percent, the longer you wait the tougher it will be.
My last piece of advice for those of you who have children in college or who are getting ready to go to college and who are going to need assistance, the sooner you start looking for creative options, the better things will be for you and your child’s future.
Good luck!
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.