We spoke with Reshma Kapadia, a senior writer at Barron's, about her recent article “How Your Kids Can Ruin Your Retirement, and How to Make Sure They Don’t,” to understand how parents can protect their retirement in the face of rising college tuition costs.
Making the Best Decision
It isn’t necessarily always the best idea to pursue a higher-tier school, even if it is within academic reach of a student. Parents need to carefully consider their finances to make the best decision.
“I will allow that there are certain schools where the networking or prestige where you can make a case that maybe it does help,” Kapadia said. “There might be a case for spending money here. But beyond those 12 or 15 schools, I think it's a much harder case to make.”
Often, the difference between a school ranked 35 versus 55 doesn’t merit the additional expense, she noted. Choice of major and the job prospect landscape post-graduation also need to be considered.
“A lot of people just don't know the resources that are available,” she said. “More affluent folks also just assume they're not going to qualify for financial aid. They don't even think about it or go through the motions.”
The reality is, people need to think of college as an investment decision, Kapadia added, with an eye to their return on investment. Controlling costs can pay off substantially in the long run, both for parents and their children.
“There are many different ways of bringing in that cost,” she said. “It may be worth considering community college or state schools, and just having a realistic expectation of what schools cost.”
Life After Graduation
Adult children are increasingly returning home at higher rates than in the past, Kapadia noted. There are many different reasons for this phenomenon. If students took on larger loans to attend college, the debt burden may be challenging to bear right out of school.
The cost of living in many cities is quite high, and even with a degree in a high-demand field, graduates may still have trouble making ends meet.
Offering assistance may be well-intentioned, but it needs to be done in the right way, Kapadia stated. Often, parents are stretching financially to help their children, without considering the impact it is having on their own retirement.
“Sometimes, it creates bad financial habits in that adult child, and it creates a cycle,” Kapadia said. “These are things to consider. There are ways to help your children if you have the means to do so without creating that negative cycle.”
Paving the Way for Success
It is important to create a financial dialog with children, Kapadia stated. This can resolve a lot of potential problems before they become large issues, and temper expectations about what is feasible in the future.
Planning debt carefully is another important aspect of helping children financially. One rule of thumb is to not to take on more debt than can be paid off within five to 10 years, Kapadia stated. Eliminating debt entirely is desirable, if possible.
It is better to have children assume the debt, especially for those approaching retirement, Kapadia noted. The reality is, we’re spending a tremendous amount of money on college and for some, that debt is crippling.
“It actually has a huge impact on the economy, and it continues to grow,” Kapadia said. “There was a six-fold increase in the amount of educational debt between 2001 in 2016. The biggest increase came from those who are 40 and up. Some of that was their own debt and that they were still paying off, and some of it was because they had that taken on their children’s debt.”
Proper estate planning and candid conversations with adult children can help set the entire family on a sustainable course. No child wants to have their parents bankrupted because they went to college, Kapadia noted, adding that transparency is always a good thing.
“At some point something's going to have to happen,” Kapadia said. “Sheila Bear, chair of the FDIC, has talked a little bit about getting universities to have some skin in the game, because right now they can keep raising prices, and parents can keep going out and borrowing more to pay those higher prices. To the universities, it doesn't really matter if that person graduated or not. At some point we need to rethink the system.”