Education Costs Put the Squeeze on Retirement Savings

Advisers say that parents should still consider their own needs, even when putting a child through college is a priority.

Whether carrying student loan debt well into middle age or saving for a child’s college education, Americans are increasingly finding that funding education is a major drag on their retirement savings.

While young people may delay saving for retirement because of crushing student loans and parents may think it is more important to fund their child’s education, they should not lose sight of their own needs in retirement, advisers say.

“Student loan debt is the No. 1 baggage that people come in with when they start a career,” notes James Sullivan, vice president for Essex Financial in Essex, Connecticut. “A monthly payment of $600 or $800, more than a car payment, can be crippling.”

Indeed, a survey by IonTuition found that 70% of students are graduating from college with student loan debt averaging $37,172, and that people are carrying this debt well into their adult years; 44% of Millennials are carrying student loan debt, while the same is true for 26% of Gen X and 13% of Boomers. IonTuition discovered a direct link between student loan debt and retirement savings, finding that people with no student loans have a median retirement savings balance of $56,000, but that people with student loans have a median balance of $31,000.

The majority of people are paying back their student loans over decades, notes Mike Brown, managing director of the student loan and college savings advisory firm Nitro, based in Wilmington, Delaware. While only large companies are beginning to offer workers help managing or even paying for their student loans, Brown hopes that this benefit will resonate among more employers. “It is a tremendous way to attract talent,” he says.

The IonTuition survey found that only 4% of employers provide assistance with student loan repayment, but that 76% of Americans think it would be an excellent benefit, 36% would prefer student loan repayment benefits over a 401(k), and 29% would prefer these benefits over health benefits.

NEXT: College savings

The next big hurdle that Americans face when it comes to education savings, of course, is putting their children through college. For many parents, this takes complete priority over their own retirement savings, Brown notes.

“Too often, I see someone in their 50s saying, ‘Now the kids are done with college and I will start saving for retirement,’” Sullivan says. “I get why we see this, but it is far harder for a 55-year-old to come up with a sufficient retirement plan than it is for a 35-year-old.”

John Burke, chief executive officer of Burke Financial Strategies in Islin, New Jersey, says that even for his clients, who have an average balance of $1 million and a household income of $150,000 to $200,000, funding college is an issue.

“The majority of our clients are saving in a 529 college savings plan, taking advantage of that great tax benefit, and may have a balance of $150,000, but even for a state school, which can cost $200,000 for four years, that will not be enough,” Burke says. “Maybe they have two kids and are facing a $400,000 bill. That will make it a real struggle for them to come up with enough to retire on at the standard of living they are accustomed to.”

For the majority of Americans, college savings is far paltrier than this. A survey by Sallie Mae and Ipsos found that while 57% of parents were saving for college in 2016, their average balance was a mere $16,380.

Both Brown and Burke think parents should consider putting their child through two years of community college before transferring to state or private school, to shave the cost down. Brown says that parents should also figure out how much they can reasonably afford to put their children through school, and then have an honest conversation with their children about how much they can help them.

“Otherwise, they will literally be mortgaging their future and their retirement,” Brown says. “We are going to hear more and more about parents not being able to retire because of this debt burden.” The reality is, he says, people’s children may, in fact, need to take on student debt of their own.

While many student loans require parents to co-sign, there are alternatives available to parents like a co-signer release or an income-driven repayment plan, according to Student Loan Hero. “There are other options for parents,” Brown notes. “They just need to explore them.”