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Don't save for retirement: When to ignore traditional college savings advice
http://www.savingforcollege.com/articles/don-t-save-for-retirement--when-to-ignore-traditional-college-savings-advice

Posted: 2018-01-15

by Dr. Dean Skarlis, Ed.D.

"You can take out loans for college, but you cannot take loans for retirement." It's a familiar refrain among those in the financial services community and has been sound advice for many families for years. But in 2018, it may be the worst advice a financial advisor can give to his clients. Here's why.

Cumulative student loan debt in the United States has surpassed $1.4 Trillion. It now exceeds all consumer credit card debt. Approximately 71% of students who attend 4-year colleges have taken on student loans...and that's just student loan debt. Add to that parental debt which is approaching $100 Million, and the fact that many parents have added home equity loans to their debt service (which is not counted in the above figures), and you have a crisis - a big one with lasting effects as this Money Magazine article describes.

The reason loans have exploded is of course, the exponential increase in the cost of college. According to Bloomberg, tuition, room, board and fees have increased by more than 1200% over the past 35 years. When I first began my business 13 years ago, there were a couple of dozen colleges whose total costs had eclipsed $40,000/year. Today, those same schools - and dozens of others - have now crossed the $70,000/year mark - that's more than $280,000 to educate one child. Compare these numbers with most private schools back in 1986 when I began college. Tuition, room and board at my private college was $11,000/year. That same school now charges more than $55,000/year. Even public institutions now exceed $100,000 over 4 years in California, New York and many other states.

RELATED: College costs way more than parents think

As a result, most middle and upper middle class families have few options other than to take out huge loans or attend a community college. But the problem with the "old school" advice is that families who take out loans in today's world, must seek hundreds of thousands more than I did in 1986. Back then, it was more reasonable for my peers and I to borrow $5,000 per year and pay back the $20,000 in a realistic time frame. That covered almost half our total cost. Today, this is next to impossible. If a student takes federal student loans each year of college, he would have to repay $27,000. If he adds an extra $20,000/year in private student loans, you now have more than $100,000 in debt after four years. This is a significant burden for just about any family. This scenario also assumes that mom and dad, student, or someone else will cover almost $150,000 for an expensive private college from a mix of savings and cash flow. That's a tall order.

What's worse, about 50% of graduates with a bachelor's degree under age 25 are either unemployed or underemployed, according to an Associated Press study. This means that for many students, the return on investment is simply not there, and risking hundreds of thousands of dollars on student and parent loans may not be the best course of action.

Most of the clients with whom we work are in their mid to late 40s. On average, they have saved $300,000-$500,000 in their 401(k), IRA or other qualified retirement plan. Some teachers or public employees have pensions. It is for all of these families that I have begun to give what some would call radical advice. Given the singular focus our society has placed on retirement planning, it can certainly be characterized as controversial. But here it is: Rather than save the maximum of $18,000/year (or $24,000 for people over 50) in your qualified retirement plan, divert some - not all - of those dollars into the college savings vehicle of your choice. In fact, more than 30 states, including New York, Pennsylvania and Illinois offer a state tax deduction or credit for contributions to their 529 plans. While the tax math still favors your full 401(k) contribution, the amount of college loans parents and students need will be significantly reduced.

As an example, a 47 year-old with $400,000 in his 401(k) or IRA has plenty of time to continue saving for retirement, and most models indicate that his nest egg will turn into $1.6 Million even if he stopped contributing completely - which I never recommend. This assumes he retires at age 65 and realizes an 8% annual rate of return. Meanwhile, a family with two children, may have to pay in excess of $600,000 for college over a much shorter time horizon - often within six or seven years. I have found that most parents have tried to save for college, but just don't have the time or resources to set aside enough money, given the ridiculous rise of college costs. In fact, most of our families have saved less than $60,000 for college. So their only remaining option is to take out huge loans.

Moreover, because parent assets are counted at a maximum of only 5.64% of their value in the financial aid formulas, saving more will have only a minimal effect on a family's Expected Family Contribution (EFC), and if the family's other income and assets are too high to garner more aid, then there will be no financial aid lost. We teach our clients these and other strategies to help them maximize financial aid, enhance tax savings and increase merit scholarships.

RELATED: Calculate financial aid eligibility

The bottom line is that college costs have skyrocketed at a pace much faster than any other expense, including health care, over the past 30 years. And the traditional advice of taking more in student and parent loans simply does not cut it anymore. It's time for a paradigm shift. If you disagree, please feel free to contact me or comment below.


About the author: Dr. Dean Skarlis is President and Founder of The College Advisor of New York, Inc. He has been an educator for the past three decades and has helped thousands of students and parents navigate the complex and expensive college admissions process. He and his staff of 10 help students find, gain admission to, and select colleges that are a great fit socially, academically and financially. Dr. Skarlis is considered a national expert on all issues related to college admissions, scholarships and financial aid. He has been quoted in The Wall Street Journal, The New York Times, The Washington Post, and numerous other national publications. He has also appeared on ABC World News Tonight and in other TV and print media. Dr. Skarlis and his talented staff are passionate about counseling families through the stressful college admissions and financial aid process.

"You can take out loans for college, but you cannot take loans for retirement." It's a familiar refrain among those in the financial services community and has been sound advice for many families for years. But in 2018, it may be the worst advice a financial advisor can give to his clients. Here's why.

Cumulative student loan debt in the United States has surpassed $1.4 Trillion. It now exceeds all consumer credit card debt. Approximately 71% of students who attend 4-year colleges have taken on student loans...and that's just student loan debt. Add to that parental debt which is approaching $100 Million, and the fact that many parents have added home equity loans to their debt service (which is not counted in the above figures), and you have a crisis - a big one with lasting effects as this Money Magazine article describes.

The reason loans have exploded is of course, the exponential increase in the cost of college. According to Bloomberg, tuition, room, board and fees have increased by more than 1200% over the past 35 years. When I first began my business 13 years ago, there were a couple of dozen colleges whose total costs had eclipsed $40,000/year. Today, those same schools - and dozens of others - have now crossed the $70,000/year mark - that's more than $280,000 to educate one child. Compare these numbers with most private schools back in 1986 when I began college. Tuition, room and board at my private college was $11,000/year. That same school now charges more than $55,000/year. Even public institutions now exceed $100,000 over 4 years in California, New York and many other states.

RELATED: College costs way more than parents think

As a result, most middle and upper middle class families have few options other than to take out huge loans or attend a community college. But the problem with the "old school" advice is that families who take out loans in today's world, must seek hundreds of thousands more than I did in 1986. Back then, it was more reasonable for my peers and I to borrow $5,000 per year and pay back the $20,000 in a realistic time frame. That covered almost half our total cost. Today, this is next to impossible. If a student takes federal student loans each year of college, he would have to repay $27,000. If he adds an extra $20,000/year in private student loans, you now have more than $100,000 in debt after four years. This is a significant burden for just about any family. This scenario also assumes that mom and dad, student, or someone else will cover almost $150,000 for an expensive private college from a mix of savings and cash flow. That's a tall order.

What's worse, about 50% of graduates with a bachelor's degree under age 25 are either unemployed or underemployed, according to an Associated Press study. This means that for many students, the return on investment is simply not there, and risking hundreds of thousands of dollars on student and parent loans may not be the best course of action.

Most of the clients with whom we work are in their mid to late 40s. On average, they have saved $300,000-$500,000 in their 401(k), IRA or other qualified retirement plan. Some teachers or public employees have pensions. It is for all of these families that I have begun to give what some would call radical advice. Given the singular focus our society has placed on retirement planning, it can certainly be characterized as controversial. But here it is: Rather than save the maximum of $18,000/year (or $24,000 for people over 50) in your qualified retirement plan, divert some - not all - of those dollars into the college savings vehicle of your choice. In fact, more than 30 states, including New York, Pennsylvania and Illinois offer a state tax deduction or credit for contributions to their 529 plans. While the tax math still favors your full 401(k) contribution, the amount of college loans parents and students need will be significantly reduced.

As an example, a 47 year-old with $400,000 in his 401(k) or IRA has plenty of time to continue saving for retirement, and most models indicate that his nest egg will turn into $1.6 Million even if he stopped contributing completely - which I never recommend. This assumes he retires at age 65 and realizes an 8% annual rate of return. Meanwhile, a family with two children, may have to pay in excess of $600,000 for college over a much shorter time horizon - often within six or seven years. I have found that most parents have tried to save for college, but just don't have the time or resources to set aside enough money, given the ridiculous rise of college costs. In fact, most of our families have saved less than $60,000 for college. So their only remaining option is to take out huge loans.

Moreover, because parent assets are counted at a maximum of only 5.64% of their value in the financial aid formulas, saving more will have only a minimal effect on a family's Expected Family Contribution (EFC), and if the family's other income and assets are too high to garner more aid, then there will be no financial aid lost. We teach our clients these and other strategies to help them maximize financial aid, enhance tax savings and increase merit scholarships.

RELATED: Calculate financial aid eligibility

The bottom line is that college costs have skyrocketed at a pace much faster than any other expense, including health care, over the past 30 years. And the traditional advice of taking more in student and parent loans simply does not cut it anymore. It's time for a paradigm shift. If you disagree, please feel free to contact me or comment below.


About the author: Dr. Dean Skarlis is President and Founder of The College Advisor of New York, Inc. He has been an educator for the past three decades and has helped thousands of students and parents navigate the complex and expensive college admissions process. He and his staff of 10 help students find, gain admission to, and select colleges that are a great fit socially, academically and financially. Dr. Skarlis is considered a national expert on all issues related to college admissions, scholarships and financial aid. He has been quoted in The Wall Street Journal, The New York Times, The Washington Post, and numerous other national publications. He has also appeared on ABC World News Tonight and in other TV and print media. Dr. Skarlis and his talented staff are passionate about counseling families through the stressful college admissions and financial aid process.

 

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