RETIREMENT AND PAYING FOR COLLEGE

RETIREMENT AND PAYING FOR COLLEGE 

AN $80,000 COLLEGE EDUCATION

COULD COST YOU $246,980 

Last year college tuition increased on the average of 6.65%, (public universities).  According to the federal government, the combined Social Security trust funds will be exhausted in 2036 and at that point there will only be enough income to cover 77% of scheduled benefits.

Our colleges and universities seem reluctant to address the increasing cost of educating our students and they seem to never have enough money.  However, they continue added new dorms, spas, climbing wall, basketball and football stadiums, and other amenities that have NOTHING to do with educating our students.

Our elected officials are afraid to tackle our national debt, social security, and other entitlement programs that are driving our national debt to a point that will never be able to be paid back unless, taxes are increased and spending is drastically cut.  They would rather kick the can down the road in order to assure or enhance their bid to be re-elected.   

Michael Falcon, head of retirement at J.P. Morgan Asset Management says, “America is facing an unprecedented retirement challenge as the U.S. population undergoes a radical demographic shift.  Twenty percent of the population will be over 65 years old by 2020 and, despite impressive aggregate asset growth, many Americans are still significantly short of the savings they will need for a dignified retirement and are unprepared for the complex financial choices they will need to make.”

The Employee Benefit Research Institute (EBRI), reported in its 22nd annual Retirement Confidence Survey, most Americans are not very confident about having enough money for retirement.  In 2011, just 13% were very confident.

For many families, paying for college cost and saving for retirement has put many parents in a major financial pinch.  When confronted with paying for college, many folks that have not saved for college are giving up and are forced to borrow college funds in order to continue savings for retirement.    

However, most of these families do not realize the financial dilemma they are creating if they borrow too much.  Borrowing too much in order to help pay for their children’s’ college education, WILL have a direct effect on accumulating enough money for retirement.

College Expenses And Retirement Dollars

The dollar amount spent on college expenses can dramatically affect the parents’ ability to fund retirement. 

For example:

Let’s assume a student was to attend a public university that cost $20,000 a year and the parents are in the 15% effective Federal income tax bracket, 5.5% effective State tax bracket, 1.5% local tax and pays 7.65% toward Social Security.  The total tax percent is 29.65%.  These tax percentages will play a very important role as we continue.

The parents can afford to pay $5,000 toward the student’s education and the student will receive $5,500 in student loans the freshman year ($6,500 for sophomore year and $7,500 for the junior and senior year), and the parents will qualify for the American Opportunity tax credit of $2,500. 

After deducting the parents’ contribution of $5,000, the Federal loans to the student and the American Opportunity tax credit, the remaining cost per year will be $7,000. Since the parents only can afford $5,000 from ordinary income, they decide to borrow the $7,000 through the Federal PLUS loan program and defer any loan payments until the student graduates.

The reason the parents did not make payments on the PLUS while the student was in college is because the loan payment on the PLUS loan would almost equal the $5,000 they could afford while the student was attending college ($5,000 compared to $4,394 annual loan payment).

Since the parents will borrow $7,000 each year for four-years they would accumulate $32,382 in debt plus unpaid interest at 6.41% on the unpaid balance.  Total monthly payment on $32,382 is $366.21 a month over a ten year period (see chart below).

As you can see from the chart the total amount the parents will pay back over the ten year period is $43,945.19.

In order for the parents to make the monthly payments on their PLUS loan they will have to make payments with after tax dollars.

Since the parents must pay taxes on the 366.20 monthly payments at a 29.65% they would have to make approximately $520 (before taxes) to clear the $366.20 monthly payment.  The difference is $153.80 a month ($520 - $366.20 = $153.80).

Let’s look at how much the parents actually paid to cover their part of the student’s $80,000 public college education (over a four-year period after student loans and educational tax credits).

The parents paid $20,000 over four years while the student attended college.  Since they did not make payments on the PLUS loan while the student was attending college it will cost the parents $28,000 in PLUS loan principal, $4,382 in unpaid interest on PLUS while student attended college and $11,563 in interest on the PLUS loans during the repayment period.  

Therefore, the parents total cost is $63,945.

If we were to add what the student paid (student loans + interest) and what it actually cost the parents, the total cost of the $80,000 education is actually $102,212 which is $22,212 difference. 

 

Now let’s turn the clock back and see what the parents could have done with proper planning.

Let’s assume the parents shifted some of the expense they were paying for the student while they were living at home, adjusted how they were being taxed and adjusted some of their spending habits (without changing their lifestyle) in order for them NOT to take out a PLUS loan and to cover their $5,000 a year contribution.

This would save the parents $15,945 in PLUS loan interest payments. 

If the oldest parent was 49 when the student graduated from college they could use what they were paying for college $5,000 + $7,000 = $12,000 and invested this money (5.5%) in a qualified retirement plan until age 65 (instead of paying this amount toward paying the PLUS loan off), they would have accumulated approximately $295,693.    

Since the parents did not do any planning the $80,000 college education cost the family (parent and student) $102,212 (cost of college + interest on students loans and parents PLUS loans).  If they were to have planned ahead and made just a few adjustments, (without changing their lifestyle), the education would have only cost the family $86,267, ($80,000 cost of college + $6,267 interest on student’s Federal loans).

If the parents were to have invested the $15,945 that they would have saved in PLUS loan interest and invested this savings at 5.5% in a qualified retirement plan, they would have accumulated and additional $37,554 at age 65.  See chart below.

IF the family were to have planned ahead they could have accumulated and additional $333,247 for retirement.

Therefore, you can look at what the college education ACTUALLY cost the family.  If they were to have paid the $80,000 education in the tradition way the education would have cost $102,212.

However, if they were to have planned ahead and made just a few adjustments (without changing their lifestyle), the education would have cost the family $86,267, however the parents could have increased their retirement savings by $333,247.  This is a net gain of $246,980.

You now have a decision to make, pay for college the traditional way or  Contact Us at (904) 614-5305
and let us save you thousands of dollars! College Tuition Solutions of Florida