If I had $10 for every time a financial advisor I am interviewing utters “There are no loans for retirement, but there are loans for college,” my SEP-IRA would be in a lot better shape. But my radar always starts beeping when I hear that. Sure, I know it makes absolute, irrefutable sense. But sometimes the best advice isn’t always advice that can be followed; otherwise we would be a nation of low-fat vegetarians. The logic of saving for retirement often can’t overcome the emotional urgency of providing the kids with an education.
Now that said, it’s still troubling to come across news that parents are in fact digging themselves a big retirement ditch. Fidelity’s 2009 College Savings Survey reports that 43 percent of parents expect to delay their retirement so they can afford to send the kids to school. That can be a dicey bet: Surveys report that about 20 percent of folks who didn’t plan on retiring early found themselves pushed out sooner than expected due to a layoff, illness, or caring for a family member. The Fidelity survey also reported that 15 percent of parents with high-school age children have decreased their retirement savings to pay for college.
There will be no lecture here on foregoing financing college. But that doesn’t mean you need to go it all alone. Your kid can help you stay on track with your retirement saving by taking on some of the cost of college.
Take Full Advantage of an Unsubsidized Stafford Loan. Think your kid won’t qualify because you make too much? Wrong. There is absolutely no income test for an unsubsidized Federal Stafford loan, nor do you or your child need to pass through any FICO-score qualifying hoops. (The “other” Stafford, the Subsidized Stafford, does have an income limit.) Yet according to the Project on Student Debt, students and parents fail to take full advantage of unsubsidized Staffords; 26 percent of private loan borrowers didn’t even bother to take out a Stafford, despite the fact that the 6.8 percent fixed rate on the Stafford is often half the rate — a variable rate at that — charged on a private loan. The repayment terms for federal loans are a lot better, too. And if it helps allay your guilt about having your kid help out, keep in mind that he or she will likely be able to claim a federal tax deduction for student loan interest. (It’s an above-the-line deduction that can be taken without having to file a Schedule A, a chore no parent should ever inflict on a child.) And there’s no rule that says you can’t help with repayment.
This year the max Stafford loan limits are $5,500 for freshman, $6,500 for sophomores, and $7,500 for juniors and seniors. That’s obviously not going to pay full freight at any school, but it helps. And it’s $5,500-$7,500 that you and your spouse can use today to save more for retirement. You (and your kid) should also check out this great post from Lynn O’Shaughnessy on how your college-bound kid can save you even more.
Piggy bank image via Flickr user Ken Wilcox., CC 2.0
