Making Cents: Managing College Debt
By: John P. Napolitano, CFP®, CPA, PFS, MST, RLP®
This time of year, many parents have shipped their children off to college. The shipping out is the easy part. The harder part is how to pay for that education and not be saddled with a life time of debt.
College debts are amongst the worst kinds of debts that one can accumulate. For starters the rates are so high that I feel they are borderline usurious. Rates for college loans are often twice that of a traditional home loan. With the high interest rates on these loans, both the payback term and the monthly payment will be high.
College loans are also not dischargeable in a bankruptcy proceeding. The reason for this makes sense. Defaults on college loans were higher than most types of loans, and wiping them out in a bankruptcy became somewhat common and eventually problematic. This becomes a huge problem for many, especially those who became completely disabled or unemployed for an extended period of time.
College loans frequently prevent a younger person from affording their first home. First time home buyers are older now than in generations past in large part to the overwhelming amount of student debt carried by so many.
Tapping a retirement fund to pay for college is also a bad idea. You'll either pay current taxes on the money or borrow against your balance which could become a tax problem at retirement or upon changing jobs.
At a cost of over $60,000 per year for many private universities, it is easy to understand why this debt is so common. It would behoove many parents to have these college discussions with their children as early as possible. It is never too late to conclude that you can't fully fund a four year private education, especially if your goal is to educate more than one child.
Some of the obvious choices include searching for an institution that meets your needs and budget. For some, this may mean a state school education. But there is a problem with that for many students these days. That problem is admissions. We are not the only one to think of this idea, so admissions at all top state universities has become extremely competitive.
If you've got time to plan, figure out how much you'll need to save to accumulate enough for whatever type of education that you are willing to fund. If you can't make that happen, it isn't out of line to speak to your children's grandparents. Many grandparents want to assist with this modern day luxury problem, but simply don't know how or whether they can afford to help. The gifting limits for educational gifts allow anyone to pay for tuition and fees directly to the institution and avoid the federal gift tax limit of $14,000.
A little skin in the game from junior can help financially, as well as give your child an ownership interest in that education. Amazing how the level of interest goes up when someone is paying their own way.
John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.