Couple meeting with their financial advisor to discuss saving for retirement and their children's college expenses.

January 23, 2019

How to Plan for Sending Kids To College As You Retire

Funding retirement and financing a child's higher education always take planning and diligence. But those considerations are even more important for later-in-life parents who look to leave the workforce around the same time that their children head to college.

“If a significant portion of your income and assets are tied up in real estate and stocks, it can pose cash flow problems when tuition is due," said Paul DeLauro, manager of wealth planning for City National Bank.

For the growing numbers of older new-parent families — first births to women in their mid- to late 30's and 40's have risen for decades — preparation for these major life expenses may require careful strategizing, creativity and a willingness to pursue non-traditional paths.

First, parents need to prioritize their financial goals. While many moms and dads consider it their duty to make sacrifices for their children's education, financial experts caution against jeopardizing retirement funds to pay for college.

Angie O'Leary, head of wealth planning at RBC Wealth Management-U.S., said retirement funds should stay in retirement accounts, "especially if you're approaching retirement. It's really hard to get those funds back in there." In addition, she noted, funds borrowed from a 401(k) must be returned within five years, otherwise it will be considered a 401(k) distribution and will be subject to income tax and possibly a 10 percent early withdrawal penalty.

Parents who want to do everything for their children might consider that advice unthinkable, but they'd be wise to reconsider. “You're better off having them take money out in a college loan than putting your own retirement at risk," said DeLauro.

College is Costly and Requires a Cash Flow Strategy

Starting to save diligently and consistently from a young age is the best financial move anyone can make. Mothers and fathers who socked away funds in retirement accounts before their kids came along may be well-positioned both for retirement and paying for college, since they have the liquidity they need to cover tuition payments.

"I think our clients do a good job of trying to save for college," but if they have multiple kids, the college savings accounts tend to look different for each child, said O'Leary. "The first one is fully funded, the second one is partially funded, and the third one is not funded much."

For parents in that situation, they'll need to plan for how they will manage their cash flow while taking on such a large expense, DeLauro noted.

Tapping home equity lines of credit, which typically carry lower interest rates than student loans, can be a good way to address cash flow and help parents continue to build wealth, said O'Leary. She and her husband took that route to help pay their children's college bills, paying off the debt with year-end work bonuses.

Parents can also take out credit lines against the taxable portion of their investment portfolios, which many do to pay for college, she noted.

A financial advisor will be able to look at your assets and evaluate a cash flow strategy that utilizes debt without putting the health of your retirement fund and savings plan at risk.

Alternative Funding Sources

Putting their own retirement savings first doesn't mean parents can't help make higher education a reality for their children. Beyond the fundamental advice to spend less and save more, parents can explore several steps to help build up education funds and lower college expenses, including alternative money sources.

If grandparents, aunts or uncles are financially able to contribute, you might suggest they make gifts to a 529 college savings plan or another type of account rather than spending money on the latest toy for your youngster.

Under current federal law, an individual may make an annual tax-free gift up to $15,000, so a couple with the means could provide $30,000 per year to each grandchild, DeLauro noted. These grandparents could also choose "front-loaded gifting" — bestowing five years' worth of tax-free gifts, or as much as $150,000 per grandchild, at once.

Doing this for a newborn or young child should produce a nice nest egg by the time he or she starts college, DeLauro noted.

Students with top grades often land generous academic scholarships, but they're not the only ones. Consider schools that make financial awards based on athletic skills, musical talent or other gifts your child may exhibit, or that may be looking to diversify their student population in some way. Many non-profit, community and private organizations also award scholarships based on merit, financial need or other criteria.

It's important for every family, to file the Free Application for Federal Student Aid, or FAFSA, especially if parents are heading into retirement, said O'Leary. Student financial aid is usually easier to obtain when parents are retired because earned income is lower, she said.

Broader School Search

College choice can make a significant cost difference.

DeLauro recommends looking beyond what many consider the "top schools," or those where their child's best friends plan to go, and researching less sought-after institutions that offer an excellent education at more modest cost.

"Every college in this country probably has famous alumni," she said. “After you've been in the workforce for a few years it kind of doesn't matter where you went to school."

Parents can set expectations for their children if they need to explore higher education alternatives, DeLauro noted. To save money while completing basic coursework, for example, students may attend junior or community college for the first two years, then transfer to a four-year university.

"No one looks at where you started college, they look at where you finish college," said DeLauro.

And families shouldn't necessarily overlook trade schools that can set a student on a meaningful vocational track, she added. "Not everyone is meant for college."

College can indeed be affordable, RBC's O'Leary noted: “You may have to live at home, which is what I did when I went to college."

That may be preferable to attending a more expensive university and graduating with $100,000 in student loans, as some students do. “That just breaks my heart. They are going to have financial difficulties for the rest of their lives," said O'Leary.

Involving Children

As children get closer to college age, they can become an active part of the effort to plan their education by researching schools and scholarships and figuring out the most advantageous route to take.

In 2017, American parents' income and savings covered 23 percent of college costs and their borrowing contributed another 8 percent, Sallie Mae reported. Student income, savings and borrowing covered 30 percent, and scholarships and grants accounted for 35 percent.

Some students may need to work part-time while going to school, or go to school part-time while working, as many have for generations, DeLauro noted.

“I really appreciate that parents want to do so much for their kids, but sometimes the best lesson you can learn as an adult is to be self-sufficient, and 18 is a good age to start," she said.

O'Leary and her husband required their oldest child take out a college loan, then surprised him by repaying it when he graduated. “We wanted to make sure he had some skin in the game," she said.

DeLauro recommends that parents sit with a financial planner who can help them understand their situation and help them formulate a plan for assisting children with college expenses.

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