9 Replies Latest reply on Aug 26, 2010 3:32 PM by JerryD

    Paying for college, then retirement


      So here's where we are at the moment: a child who's a senior in high school, presumably about to enter a four-year college with costs somewhere around $50,000 a year. We're also within 5-10 years of retirement for one or both of us.

      The way I look at college expenses, it makes more sense for us to fund the lion's share by borrowing against our accumulated home equity rather than emptying out our savings. (Thankfully, there are good 401ks waiting for us once we get to 59.5)  Presumably, we will be selling this home to coincide with retirement and even with the housing market decline, we could pay back any outstanding HELOC plus the mortgage, and still walk away with some cash after a sale.

      So my question: what's wrong with this strategy? I'm sure there are arguments against it, but I haven't come up with them. Please play devil's advocate with me.

        • Re: Paying for college, then retirement

          Unless you're willing to post specific financial details - which I would NOT suggest that you do - I think you need someone to actually 'run the numbers' for you in different scenarios: best case, middle of the road, worst case. Retiring early before Medicare kicks in means being able to fund healthcare during the gap. Can you cover catastrophic illness on one or both of you? What if something unexpected happens and housing prices fall again, or the market really tanks making the value of your 401k's fall again? What if one of you gets disabled? What if your child graduates but can't find a job and needs to remain at home? Will higher taxes (federal, property, state) give you less margin for error?

          It isn't strategy that's the issue here. It's being sure that the numbers really work against a variety of "what-if's?" You want to really think about the risks that every decision entails should any of your assumptions fall victim to unexpected circumstances you can't control. Good luck!

            • Re: Paying for college, then retirement

              You're absolutely right about needing a financial advisor to guide us with retirement issues. That is a given, and we won't make any move before we sit down well in advance and weigh all the options.

              But my real question here has to do with funding our child's college expenses. Is looking at a HELOC to do the heavy lifting my best bet, or is there a reason to instead think about other options: borrowing against or withdrawing from 401ks (bad idea, I know, but just throwing it out there as an alternative); going heavily with government-guaranteed tuition loans; or depleting other savings that would leave us without much of a cushion until we can access 401k and IRA funds in a few years.

              If anyone has gone through this and can share their experience, it would be helpful. Thanks...

                • Re: Paying for college, then retirement
                  Bruce, I work for a financial planner in VA.  His specializes in retirement planning for retirees and pre-retirees (baby boomers).  He is fee based (no commissions, which is important).  He is very helpful to our clients guiding them through questions such as yours with 20 years experience.  I'm not necessarily selling his services since I don't know where you live, however, you can get a financial plan done and it's worth it to know whether you are presently ahead or behind toward your retirement (he charges approx $1,500-2,000 depending on your situation).  It will give you peace of mind to have a good idea of where you are now, when you can afford to retire, and what you need to do to get there and avoid running out of money in your retirement.  This includes recommendations on a portfolio allocation as well.  An experienced FP will also provide you with advice how how to manage your money, such as your question about college funding.  It is sad how many couples we see come in that did not "plan" and are so far behind that they have to drastically change their current standard of living to get on track.  I believe he would say definitely don't use your 401(k)s!  What about your child getting loans to help take the load off of you, as well as working, and supplement with the HELOC if you must?  My daughter waitressed all through college to help pay for books and spending money.  It taught her the value of money and responsibility and it's a good idea for them to have a stake in their education.  It's almost the norm these days for kids to come out of school with loans. It is NOT fair to you and not advisable for you to jeapardize your security in retirement to pay all her college expenses.  Gool luck.
                    • Re: Paying for college, then retirement
                      serbing said...

                                ... My daughter waitressed all through college to help pay for books and spending moneyIt taught her the value of money and responsibility and it's a good idea for them to have a stake in their education.  It's almost the norm these days for kids to come out of school with loans. It is NOT fair to you and not advisable for you to jeapardize your security in retirement to pay all her college expenses.  Gool luck.

                      I called it having them "put some skin in the game". It is easy to get relaxed and comfortable about somebody else paying big bucks while you work "so hard" at studying. I did not care if I could or could not afford it (sometimes it was a struggle), every kid provided their own spending money and transportation. I paid for the school and books. They were welcome to live at home like I did while they got educated. And 2 out of 3 went at least 2 years to a junior college close to home first. The 3rd finished her degree in around 3 years.

                      Nothing like being able to say that you helped pay for your education. Makes you appreciate what a big, worthwhile investment takes.

                      I absolutely agree that you should not jeopardize your retirement since it is coming fast. The options for paying for college are much better than those for retirement. Just don't let debt scare the kids off from going for it. Tell them that you have their back.

                      Another post talked about paying an adviser to address the options.  Depends. If you understand spreadsheets, I would at least take a crack at the analysis. Even if you default to an adviser you will have your thoughts in better control. It may even be cheaper due to the reduced effort on his part.

                      By the way, I find that many "calculators" for most topics are just too general and inflexible. Use them to get the jest of things and then fly your own spreadsheet.
                    • Re: Paying for college, then retirement

                      I have posted this before, but will post it one last time.

                      The advisors who are allowed to do 'financial planning' are Registered Investment Advisors. That category consists of:

                      1) Certified Financial Planners; 2) Chartered Financial Consultants; 3) CPAs with an additional Personal Financial Specialist credential; and for life insurance purposes only, 4) a Chartered Life Underwriter.

                      Standard advisor advice is to not touch any retirement or savings funds for college aid purposes. The reasoning is that your children can always get a loan to go to school, but no one is going to give you a loan to retire! I just don't believe anyone on an anonymous forum should be giving you such specific financial advice in this situation. One can posit generalities 'until the cows come home,' but everyone's situation is completely unique.

                      Can you use your HELOC to fund college tuition? Certainly. Is it in your best interests? It would require financial analysis to determine that. There are pros and cons to every alternative. Without very specific details it is impossible for any of us to say what you should do.

                      It takes time to find a good RIA. You will want to interview them, see sample financial plans, and check out at least 3 references. Start now, and you should find one within the next three months. Then you will need to have all your papers ready, and it will take more time to analyze them and produce the financial plan and related recommendations. This is not a simple or instant process. I urge you to get started as soon as possible. Again, best of luck to you in making these tough decisions.

                      • Re: Paying for college, then retirement
                        We used the Federal Direct PLUS loan program and were very happy with it.  Competitive interest rates, easy to get, can payoff at any time; and I liked the fact that it has a built-in life insurance policy--the outstanding debt is canceled if the lendee (you) dies before the loan is paid off.   Downside---not bankruptable.  But then again, you don't tangle up your house into the project.

                        However, we used PLUS loans only for the first year, and then cut spending to the bone and added some overtime in order to  pay tuition from cashflow.  Interesting challenge, but we'll have so much more money when we do decide to sell the house.
                    • Re: Paying for college, then retirement
                      You also might consider sending your daughter to a less expensive university. Some state universities are as good as the private schools but cost much less. There are even private universities with much lower costs that could allow you to "pay as you go." My oldest was able to attend an inexpensive private university where he paid his own way through work, $200 a month from me, a partial scholarship, and a student loan for $2000 for his final semester. Upon graduation he got a job as a finance analyst for a tech firm and paid off the loan in six months. My second is a senior at the same university, working his way through with a part time job, a small scholarship, and savings from a summer internship. He will graduate next year with no debt. My third is a college sophomore who got a full tuition academic scholarship and is paying for room and board with savings from summer employment. All three attended a highly ranked four year private university where tuition is only $2145 per semester. Total costs for each year run about $11,000. Our daughter is a junior in high school and wants to go to the same school, which would be fine with us. If she does, we plan to pay for it out of current income, and the costs should average about $1000 per month. Hopefully that cost can be reduced by half or more if she can qualify for a scholarship, work part time, and if we can save up a little more over the next year and a half. Helping your kids get a high quality education doesn't have to downscale your retirement or put you deeply in debt. Good luck!
                        • Re: Paying for college, then retirement
                          Excellent point on searching for a lower cost, yet quality education.  My youngest was definitely NOT going to a community college for his AA (his words!) and his first two years before going on the his choice university...yet, after going to several CC summer classes right out of high school, he changed his opinion of the community college.  Because I am a professor at the CC, we were able to make contacts and strategically plan his course of studies and he went on to have a wonderful experience at the university, where he obtained his B.S. In the end, we saved thousands due to several factors.  So, it wasn't so definite as he had originally thought and now that the economy is shaky, it would be an impossible burden to ask him to help out with our retirement costs!  I am so glad we didn't have to put either of us in that financial situation to deal with in a few years.  Just a thought...
                            • Re: Paying for college, then retirement

                              I do think a degree is worthwhile – there are so many jobs where they won’t even consider you without one – but going into serious debt to obtain it is no longer a guaranteed payoff. I saw this just two days ago:


                              ""What's a Degree Really Worth?

                              WSJournal February 2, 2010 (excerpted)


                              A college education may not be worth as much as you think.


                              Most researchers agree that college graduates, even in rough economies, generally fare better than individuals with only high-school diplomas. But just how much better is where the math gets fuzzy.


                              The problem stems from the common source of the estimates, a 2002 Census Bureau report titled "The Big Payoff." The report said the average high-school graduate earns $25,900 a year, and the average college graduate earns $45,400, based on 1999 data. The difference (over 40 years) is $780,000.


                              Mark Schneider, a vice president of the American Institutes for Research, a nonprofit research organization based in Washington, calls it "a million-dollar misunderstanding."


                              One problem he sees with the estimates: They don't…factor in debt, particularly student debt loads, which have ballooned for both public and private colleges in recent years. In addition, the income data used for the Census estimates is from 1999, when total expenses for tuition and fees at the average four-year private college were $15,518 per year. For the 2009-10 school year, that number has risen to $26,273, and it continues to increase at a rate higher than inflation.


                              Dr. Schneider estimated the actual lifetime-earnings advantage for college graduates is a mere $279,893 in a report he wrote last year. He included tuition payments and discounted earning streams, putting them into present value. He also used actual salary data for graduates 10 years after they completed their degrees to measure incomes. Even among graduates of top-tier institutions, the earnings came in well below the million-dollar mark, he says.


                              And just like any investment, there are risks—such as graduating into a deep economic downturn. That's what happened to Kelly Dunleavy, who graduated in 2007 from the University of California, Berkeley, with $60,000 in loans. She now works as a reporter for a small newspaper in the Bay Area and earns $34,000 a year. Her father is currently paying her $700 monthly loan payments. "It's harder than what I think I expected it to be," she says.


                              "Averages don't tell the whole story," says Lauren Asher, president of the Institute for College Access & Success, a nonprofit group based in Berkeley, Calif. She points out that incomes vary widely, especially based on majors. "The truth is that no one can predict for you exactly what you're gong to earn," she says. ""