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Don’t risk retirement to pay for college

With graduation season upon us, financial planner Michael Garry often finds his advice to clients balancing retirement and college savings goals falling on deaf ears.

“I tell them not to do anything (in terms of college spending) that will jeopardize retirement, and they all fight me on that,” he said. “People look at how much money they are making and don’t want their kids to be burdened with debt.”

Though student debt is a big problem, parents rarely consider possible income shocks like job loss that could derail both goals, said Garry, founder of Yardley Wealth Management in Newtown, Pa. His clients are mostly late-career or newly retired professionals with assets of more than $500,000.

Affluent and more modest investors alike – particularly those who are putting kids through college during the final years before or even in retirement – should keep these tips in mind:

Deal with the debt upfront. Don’t be the parent who blindly takes on debt so a child can pursue a college major that has little practical value in the job market, Garry said.

By the same token, he said, don’t be the one who forces Junior into investment banking for the perceived salary pay-off.

The key, he said, is helping a child choose education that will feed his or her career passion, then managing the debt.

By his own account, Garry “borrowed a truckload” of money for business and law degrees and worked at law and brokerage firms before ultimately founding a financial planning firm. When he finishes paying off his student loans in a few years, his oldest child will be a freshman in college.

He hasn’t paid off the debt – down to about $9,000 – because he’s been investing and earning a higher return than he’s paying on the loans, but he acknowledges the sheer size of loans for graduate degrees can be crushing and ultimately back graduates into career corners.

If at all possible, he said, discuss some limits with your grad. A good rule of thumb, he said, is limiting loans to no more than one times the expected first-year salary, or an average of the first five years of salary.

Garry’s own debt from business and law schools was about two times his starting salary, and it did color his own and his fellow graduates’ career choices, he said.

Encourage work. Talk with your college-bound student in terms of the investment the family is making, Garry said. Get the student to evaluate courses based on skills he or she will need for the future, and to start early to translate those skills into internships and jobs.

Stay up on aid changes. Be aware that changes may be coming to the financial aid application process.

Legislation was introduced last month that would raise the annual income level – to $30,000 from $23,000 – that ensures maximum federal grant funding. It also would allow families to apply using earlier tax returns, so, for example, a family could submit a 2012 return for a 2014 financial aid application.

“Right now, we don’t have a very well-aligned process” for submitting the Free Application for Federal Student Aid (FAFSA), said Justin Draeger, president of the National Association of Student Financial Aid Administrators, which supports the measure. Families have to scramble to file tax returns early or they have to file the FAFSA, then amend it later once the return is complete, he said.

Draeger acknowledged that using the earlier data could also increase the number of special-case applications colleges receive. A longer time period means more families with variable income, job loss or death of a breadwinner would have a very different financial picture by the time they apply.

But the key targets for financial aid, very low-income families, tend not to have highly variable income that would change the financial aid equation, Draeger said.