How to balance paying for college and saving for retirement

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You must contribute at least enough money to your retirement plan to get any business before saving for college.

Parents ranked saving for college a higher priority than saving for retirement, even though financial advisors generally recommend parents put their own needs first.

Just over a quarter of parents named saving for college their top priority, while 22% of respondents ranked retirement first, according to the Fidelity Investments 2022 College Savings Indicator, released Tuesday.

Yet parents should make the mistake of contributing to their retirement account first, say financial advisers. “There is no financial assistance for retirement,” said Stacy Miller, certified financial planner at Bright Investments in Tampa, Florida.

Parents can easily put themselves in over their heads when borrowing in their own name to help finance their children’s education. Too much debt can prevent parents from saving for retirement and even from retiring on time.

It is possible to juggle the two priorities, experts say. Here’s what you need to know.

Set realistic savings goals

Parents should aim to save about a third of their total estimated college costs, advisers say. In this general rule, another third will be paid for by the parent’s regular income and another third by borrowing (either by the student, the parent or both), said Debbie Schwartz, founder of Road2College, a community that provides resources and tools to help parents find colleges that are affordable and that their students can enter.

To set accurate savings goals, it’s important to estimate the cost of college when your student is ready. More than a quarter (26%) of parents estimate their child’s education costs based on their own college experience, Fidelity said, and they will be shocked when they see how much prices have gone up since then.

Fidelity offers a college savings calculator that tells parents how much of their child’s future expenses they can afford. It cites average total annual fees for the 2021-22 academic year at $51,690 for private four-year colleges and $22,690 for public four-year universities, though some schools’ prices may be much higher. .

Just like with retirement savings, an early start helps when it comes to saving for college. You can open a 529 college savings account for your baby as soon as your newborn gets a social security number. Parents whose employers offer company matching on their 401(k) retirement plan should contribute at least enough to get the matching, then if college is a priority, they can consider diverting additional savings to a 529 said Rita Assaf, vice president, retirement and college at Fidelity Investments.

Be smart about borrowing

Many parents don’t realize the limits of federal student loans until their child begins receiving offer letters from colleges and universities, Schwartz said. Dependent students can only take out about $27,000 in federal loans for the four years of study. That doesn’t come close to covering many education bills, but at this point parents are in a corner.

Parents can decide to take out Parent PLUS loans to finance the difference between what they can afford to pay from their savings or income and what they owe. These federal parent loans have higher interest rates than federal student loans, and interest begins to accrue immediately. The current rate for Direct Parent PLUS loans is 7.54%. “It’s a crazy train if they have to pay well before they retire,” said Jody D’Agostini, certified financial planner at Equitable Advisors/The Falcon Financial Group in Morristown, NJ.

President Biden recently announced a plan to forgive up to $20,000 in student loans for eligible borrowers, including up to $10,000 in Parent PLUS loans. Yet this discount only applies to loans obtained before June 30, 2022 – new loans are not eligible.

Families who understand the limits of federal student borrowing in advance can focus their college search on more affordable options, including public schools and state colleges more likely to provide college aid. merit to their students, Schwartz said.

And if the family is really strapped for money, their kids should consider going to community college for a few years and then going to four-year college for their junior and senior years. Community colleges cost only a fraction of what public colleges do.

Write to Elizabeth O’Brien at [email protected]

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