Retirement nest egg or college savings: Does the conversation need to change?
By Paul Wilson
The issue of student loans has been in the spotlight of late, with President Obama and Mitt Romney trading jabs on the topic this week as part of their ongoing pursuit of the young voter.
And the focus make sense, considering Americans now owe more on their student loans than on their credit cards or car loans, according to a new report from the Federal Reserve Bank of New York.
Americans now owe $870 billion in student loan debt, compared to $730 billion in auto loans and $693 billion in credit cards, the report said.
And the issue doesn’t just affect new graduates, either. One-third of the balance belongs to those between the ages of 30 and 39, while another third is held by people older than that. Clearly, many people are not paying off their student loans at an early age.
This brings up a common discussion for advisors and their clients: Is it better to prioritize saving for retirement or paying for children’s educations?
A new blog by David Ning on U.S. News makes an argument for the former, claiming that paying for your child’s education at the expense of your own financial needs is a huge mistake.
Ning says that when children pay their own college expenses, it teaches them about the value of money.
In addition, student loans are one of the best kinds of debt due to low interest rates and generous tax deductions, and also allow children to delay making payments, unlike most bills faced by retirees, according to Ning.
However, despite a steady stream of advisors offering similar advice, nearly one-quarter of Americans plan to use money from their retirement funds to pay for their children’s college educations, according to a 2010 study by Sallie Mae and Gallup.
How do you convince self-sacrificing parents that their own retirement savings is more important than a good education for Junior?
And with many middle-age parents still struggling to pay off their own student loans, is it getting harder to make arguments about “good debt?”
Then there is the question of the retirement prospects of future generations. Already relying on 401(k)s rather than pensions and facing the likelihood of a future without the comforting presence of Social Security, won’t they have enough trouble saving for their own retirement without the specter of student loans peering over their shoulder?
A USA Today piece published today described the retirement prospects of Generation X as a “house fire,” while the retirement strategy of Generation Y is said to be “wobbling on its last two legs: a job and a 401(k).”
In the same article, Richard Mason, president of corporate markets for ING U.S. Retirement said, "Our research shows over a third of Gen Y entered the work force with more college debt than their parents. They see student loan debt as their biggest barrier to 401(k) participation."
Considering the unique and nasty characteristics of this new environment, would you consider changing the way you approach the retirement vs. college savings conversation? Given this new reality, should retirement savings still trump college tuition?