When college and retirement collide

With more families being formed later in life, children are often entering college near the time that their parents are preparing for retirement.  Providing educational funds for our children, while simultaneously saving adequate funds for retirement, can be very challenging. Here are some tips to help with this possible dilemma.

1. By saving $5,000 per year when your child is born, with a 5 percent rate of return, you will have over $140,000 available when your child begins college.
2. Using the previous example, with a 529 College Savings Plan, the $50,000 in investment gains would not be taxable, as long as the funds were used for the child’s college education or any other family member’s college education.
3. Choose your 529 Plan wisely.  In Colorado, the best 529 Plan for most people is the College Invest Direct Portfolio Savings Plan.  Assuming a $5,000 per year contribution over 18 years, a Colorado resident can deduct $90,000 from their Colorado income taxes, saving over $4,000 in Colorado state taxes.
4. Grandparents are often willing to help with the grandchildren’s education.   If your parents have adequate funds for their retirement, they can contribute to their grandchildren’s 529 Plans, with gifts of up to $65,000 each in a single year.  If grandparents are Colorado residents and the 529 Plan is a Colorado College Invest plan, they can fully deduct their gift from their Colorado state income taxes.
5. If a Colorado resident has a 529 Plan in another state that has a zero or negative gain, they can remove these funds from that 529 Plan with no penalty.  To assure these funds are not treated as a rollover, wait 61 days and then invest them into a Colorado College Invest Plan. The full contribution amount receives a Colorado income tax deduction.
6. If student loans are required, use federal student loans originated by the Department of Education under the Federal Direct Loan program.  These loans qualify for Public Service Loan Forgiveness (PSLF).  If the student works ten years for a non-profit or governmental organization, the full amount of the loan can be forgiven. 
7. Never cosign a student loan.  Cosigning any loan is the same as being the only signer on a loan.  Generally, student loans are never discharged, even in bankruptcy.  As the cosigner, the loan must be repaid even if the student has become completely disabled or has died.  If a payment is missed, the cosigner’s credit is damaged, even if they are not aware of the missed payment.
8. Some people have adequate finances to pay for any amount of college education without encumbering their retirement.  For others, choices must be made.  My wife and I could provide funding for our two children to attend any of the Colorado state-supported schools.  While our children were encouraged to consider any school, they knew it was their responsibility to find the additional funds if their educational expenses exceeded those of an in-state school.

A colleague and his wife decided they could pay for all of their children’s expenses through high school, but their children would be required to finance their own college education.One child put himself through school with ROTC and is currently serving in the Air Force.The other child received a volleyball scholarship and paid the remaining expenses with student loans.Upon graduation, she went to work for a non-profit that qualified for the Public Service Loan Forgiveness (PSLF) program.After working for a PSLF qualified employer for ten years, the remainder of her government sponsored student loan will be forgiven.

As a parent, it is critical to determine how much you can afford to pay for your children’s education, especially if to do so could significantly reduce your retirement savings.  This dilemma is exacerbated when children enter college at a time that is close to their parent’s retirement.   As early as possible, make decisions about the amount of funds that can be committed to your children’s education and how these funds will be saved.  Your financial planner can help you determine the best strategies for meeting such goals as funding your children’s college education, while maintaining adequate retirement funds.