PREMIUM TOOLS

Savingforcollege.com

You do not have to trade retirement for tuition
http://www.savingforcollege.com/articles/you-dont-have-to-trade-retirement-for-tuition-741

Posted: 2015-03-19

by Kathryn Flynn

Financial Professional Content

Student loan debt has had such a negative impact on American households that many parents will do almost anything to keep their children from having to borrow to pay for college, even if it means sacrificing their own retirement savings. According to T. Rowe Price's Family Financial Trade-offs Survey, 75 percent of parents surveyed claim that student loan obligations are preventing their families from things like taking better vacations, saving for retirement, saving for college and even buying a home. So it's not too surprising that 57 percent of parents surveyed believe saving for their children's education is more important than saving for their own retirement.

Yet, even though so many parents say that saving for college is a top priority, only 31 percent are using a 529 college savings plan. We think this is an opportunity for you, as advisors, to reach out to your clients and explain that they shouldn't have to compromise their retirement for their children's education. Here's how:

Keep loans manageable

Experts agree that when it comes to prioritizing your savings, retirement should always come first. Why? Because you can't borrow to pay for your retirement, but your child can take out student loans to pay for college, right? That's right, and not to mention there are also scholarships and grants available to help pay for college. It's unfortunate that student loan debt in the U.S. has topped $1.2 trillion, forcing the "boomerang generation" to move back home with parents after college. But what families need to understand is that student loans don't have to be so bad, as long as the student knows what they are signing up for.

The potential return on investment of a student's degree should be taken into consideration before any money is borrowed. Payscale recently released their 2015 College ROI Report, which looks at total costs, graduation rate, length of time it typically takes to graduate and the average student loan amount for over 1,200 schools to determine which are the best value. Families should be looking at the same factors to decide how much they will need to borrow and if the student will realistically be able to pay the loans back.

Of course, the best way to reduce the amount of loans needed is to save ahead of time. With compounding and tax-free earnings growth, even modest regular contributions to a 529 plan can help make this happen.

Maximize tax benefits

Financial advisors often suggest that parents should take full advantage of federal tax benefits by maxing out contributions to 401(k) plans and IRAs before starting a college fund. However, it might not a bad idea to fund retirement accounts and 529 plans simultaneously. If parents are confident that their child will attend college, they can get the same tax-free growth in a 529 as they do from their Roth IRA. Their college savings might even get an additional boost if they live in one of the 34 states (including D.C.) that offer a state tax deduction on 529 plan contributions. Financial planners can provide great value by analyzing a family's objectives and expectations to coordinate college savings with retirement planning.

College savings versus retirement savings

Minimize the effect on financial aid

Another easy way to avoid loans is to take advantage of financial aid. The U.S. Department of Education provides more than $150 billion in aid each year to more than 13 million students. According to the T. Rowe Price survey, when families were asked why they aren't using a 529 plan to pay for college, 15 percent said it was because they wouldn't get any financial aid if they did. Yet, 30 percent of the families surveyed are using their 401(k) accounts to save for college. While it is true that assets in a retirement account are not reported on the FAFSA, withdrawals taken to pay for college will be counted as student income the following year. What's more, if the parents are tapping into a 401(k), their withdrawal will be taxable as ordinary income and if they are under age 59 they will also incur a 10% early distribution penalty tax.

Savings in a 529 plan, however, are counted as parental assets on a student's FAFSA, but the effect on the Expected Family Contribution (EFC) is minimal - only a maximum of 5.64 percent of parental assets are considered available funds to pay for college. But perhaps an even greater advantage of using a 529 plan to pay tuition is that the student will not have to report anything on their FAFSA when money is withdrawn to pay for college.

Financial Professional Content

Student loan debt has had such a negative impact on American households that many parents will do almost anything to keep their children from having to borrow to pay for college, even if it means sacrificing their own retirement savings. According to T. Rowe Price's Family Financial Trade-offs Survey, 75 percent of parents surveyed claim that student loan obligations are preventing their families from things like taking better vacations, saving for retirement, saving for college and even buying a home. So it's not too surprising that 57 percent of parents surveyed believe saving for their children's education is more important than saving for their own retirement.

Yet, even though so many parents say that saving for college is a top priority, only 31 percent are using a 529 college savings plan. We think this is an opportunity for you, as advisors, to reach out to your clients and explain that they shouldn't have to compromise their retirement for their children's education. Here's how:

Keep loans manageable

Experts agree that when it comes to prioritizing your savings, retirement should always come first. Why? Because you can't borrow to pay for your retirement, but your child can take out student loans to pay for college, right? That's right, and not to mention there are also scholarships and grants available to help pay for college. It's unfortunate that student loan debt in the U.S. has topped $1.2 trillion, forcing the "boomerang generation" to move back home with parents after college. But what families need to understand is that student loans don't have to be so bad, as long as the student knows what they are signing up for.

The potential return on investment of a student's degree should be taken into consideration before any money is borrowed. Payscale recently released their 2015 College ROI Report, which looks at total costs, graduation rate, length of time it typically takes to graduate and the average student loan amount for over 1,200 schools to determine which are the best value. Families should be looking at the same factors to decide how much they will need to borrow and if the student will realistically be able to pay the loans back.

Of course, the best way to reduce the amount of loans needed is to save ahead of time. With compounding and tax-free earnings growth, even modest regular contributions to a 529 plan can help make this happen.

Maximize tax benefits

Financial advisors often suggest that parents should take full advantage of federal tax benefits by maxing out contributions to 401(k) plans and IRAs before starting a college fund. However, it might not a bad idea to fund retirement accounts and 529 plans simultaneously. If parents are confident that their child will attend college, they can get the same tax-free growth in a 529 as they do from their Roth IRA. Their college savings might even get an additional boost if they live in one of the 34 states (including D.C.) that offer a state tax deduction on 529 plan contributions. Financial planners can provide great value by analyzing a family's objectives and expectations to coordinate college savings with retirement planning.

College savings versus retirement savings

Minimize the effect on financial aid

Another easy way to avoid loans is to take advantage of financial aid. The U.S. Department of Education provides more than $150 billion in aid each year to more than 13 million students. According to the T. Rowe Price survey, when families were asked why they aren't using a 529 plan to pay for college, 15 percent said it was because they wouldn't get any financial aid if they did. Yet, 30 percent of the families surveyed are using their 401(k) accounts to save for college. While it is true that assets in a retirement account are not reported on the FAFSA, withdrawals taken to pay for college will be counted as student income the following year. What's more, if the parents are tapping into a 401(k), their withdrawal will be taxable as ordinary income and if they are under age 59 they will also incur a 10% early distribution penalty tax.

Savings in a 529 plan, however, are counted as parental assets on a student's FAFSA, but the effect on the Expected Family Contribution (EFC) is minimal - only a maximum of 5.64 percent of parental assets are considered available funds to pay for college. But perhaps an even greater advantage of using a 529 plan to pay tuition is that the student will not have to report anything on their FAFSA when money is withdrawn to pay for college.

Access exclusive tools and resources for professionals only

Access our exclusive content, reports, calculators and sales leads with a Premium Subscription.

Free for Ameriprise Financial, Commonwealth Financial, Morgan Stanley, Raymond James and RW Baird.

Ameriprise Financial instructions

Consult with your office/branch manager for instructions.

Commonwealth Financial instructions

Commonwealth Financial Advisors, you will find your Savingsforcollege.com portal on CommunityLink in the Financial Planning Playbook under Education Planning Tools.

LPL Financial instructions

Visit the Education Planning page in the LPL BranchNet Resource Center to access your Savingforcollege.com portal.

Morgan Stanley instructions

Visit Tools and Forms in the Education Savings Products page in 3DResources to access your Savingforcollege.com portal.

Raymond James instructions

Visit the 529 Plan Resource Center on RJ Net to access your Savingforcollege.com portal.

RW Baird instructions

Visit the 529 Department page on BairdWeb to access your Savingforcollege.com portal.

 

Reset email successfully sent.
Please check your inbox.

Close
page loadtime mark

Advertisement


close