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Parents: Borrow for Kids' College, Jeopardize Retirement

by Jennifer Garrett / February 18th, 2013

Most parents want to give their kids a great start in life. Many will do whatever it takes. For some that means taking out loans of their own to pay their children's college tuition. But with annual costs of higher education averaging $13,600 for state schools and $36,300 for private, is it a smart move to take on your children's educational debt with your retirement around the corner? It can be, according to Sue Tirukonda, a certified financial planner with Financial Benefits Inc., in Wichita, Kan. "Loans are one tool in the toolbox...and to say [parents] should never take out a loan is not reality," she says, noting that parent loans can be a part of a sound financial plan that addresses both retirement and children's higher education. The problem, Tirukonda says, is when parents take on too much debt too late in life. "Where I struggle is when you've got a child that wants to go to a school that is so far out of the parents' affordability range, so they take out massive loans to finance more than 50% of the cost of education," Tirukonda adds. "If you're talking about $70,000 or $80,000 of debt, that's going to take a long, long time to pay off." More precisely, it would take 10 years and $846 a month to pay off $70,000 in direct loans from the federal government. Some parents can qualify for an extended repayment plan for these Parent PLUS loans, spreading payments across 25 years instead of a decade. The monthly bill would drop to $536, but the total repayment—principal plus interest—would top $160,000, compared with approximately $101,000 for the standard plan. The Education Department's student loan repayment calculator can help you figure payments.
The money discussion should happen before applications go out, not when acceptances roll in.
"Most families can't afford that kind of debt," says Joe Orsolini, a certified financial planner with College Aid Planners in suburban Chicago, "and if they are paying back that loan, that is money coming straight off their retirement." As a rule, Orsolini cautions parents against PLUS loans because there is little more than common sense preventing parents from biting off more than they can chew. And common sense, he says, often gets lost in the emotional decisions about college.

Easy money

While the government does weigh a person's credit history, it does not consider a parent's ability to repay the loan. That means parents with modest incomes but good track records could take on more in Parent PLUS loans than they could ever expect to repay. Tirukonda points out that repayment plans are not part of the process for obtaining PLUS loans. It's not like a mortgage, she says. Borrowers know at closing—and probably before—exactly how that $150,000 home loan breaks into payments of principal and interest for each month over the next 30 years. "When we take out student loan debt, that repayment number is missing," she says. "It does make it easy to take out the loans without thinking about whether we can pay them back."
After you exhaust all sources of free money and financial aid, your credit union can help bridge the tuition gap with a private student loan.

Borrow now, retire later

Of course, not all parents blindly take on unlimited debt to send their kids to college no matter what the price tag. Some decide to work a little longer to give their children the education they think they deserve. It's a strategy that can work, but unforeseen job losses or health issues can undermine those plans, says Jennifer de Thomas, a certified financial planner with New Outlook Financial in Portland, Ore. "Many people are OK with [the idea of] having to defer retirement, but they don't like to consider whether or not they will be able to do so," says de Thomas. "We may be living into our 80s and 90s, but that doesn't mean we are able to work that long." Like other student loans, PLUS loans are not dischargeable in bankruptcy. So neither hardship nor tragedy will get parents out from under their debt load. The government can even garnish Social Security checks.

Emotional decisions, financial consequences

Orsolini adds that it does not take a crisis to make the debt repayment too much to bear. He says people often underestimate their needs during retirement or they fail to consider them at all. It's a mindset—everything pales in comparison to the importance of sending their kids to the right school at any cost.
Keeping up with tuition costs is like trying to catch a moving train.
"I think that many parents are embarrassed that they have not planned and don't want to say no to their children," he says. "Even after I thoroughly explain the dangers of borrowing, parents still do it." And Orsolini believes it's a fast track to trouble. "The sad thing is that I can see it coming. I can see how much they've got saved, and I can see how much they're borrowing," he says. "Nothing frustrates me more than seeing a family with three kids resort to PLUS loans for freshman year on child No. 1. I know this will end badly for them."

More parents borrowing

Parents increasingly are turning to PLUS loans to bridge the gap between what they have saved and what college costs. The most recent data from the Department of Education show that 4% of students had parents who took out, on average, $10,800 in PLUS loans. The figures may seem small, but the Chronicle of Higher Education, Washington, D.C., reported that the number of parents taking out PLUS loans doubled in the decade between 2000 and 2010; the amount they're borrowing increased by 30%, even when adjusted for inflation. Looking ahead, the prospects only seem bleaker as public and private university tuition continues to outpace inflation. That means that even if parents could put away the total cost of tuition today, they still would need to save more every year to have enough for tuition by the time their kids went to school. "It's like trying to catch a moving train," Orsolini says.
Common sense often gets lost in the emotional decisions about college.
While she recognizes the risks, Tirukonda does not discourage PLUS or private parent loans under the right circumstances. She points out that saving is hard while kids are young and salaries are lower. Also, PLUS loans can help with cash flow for people who earn enough to pay out of pocket but not in a lump sum at the start of each semester.

Budget first, apply second

The biggest problem, Orsolini says, is when borrowing is a foregone conclusion. Parents let children choose their schools and then go about figuring out how to pay for it. That often includes using student and parent loans when savings and financial aid fall short. Orsolini thinks families need to flip the timing. The money discussion should happen before applications go out, and not when acceptances roll in. "Parents need to let their kids know what they can afford to pay for college, and they need to let them know early in the process," Orsolini says. This is critical, Tirukonda agrees, because it not only gives kids parameters to work within, but also gives them greater ownership of their decision. If they choose to apply to or attend schools that cost too much, they have to figure out how to make up the difference. That could include a private loan from your credit union, financial aid, or even deferring college for a year while they work and save money, says de Thomas. "I think they've got to have skin in the game," Tirukonda explains. "Knowing that they've put their own money into it—I think they're going to take it more seriously...and it holds them accountable for the costs that are being paid on their behalf."

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