So here’s the squeeze for the “sandwich” generation: Many boomers are financing three big-ticket items at the same time. They’re helping support their aging parents, paying college (or prep school) tuition for their kids, and are trying to fund their own retirement accounts. All this in an iffy economy, when finding a job for the 50+ demographic is tougher than ever, property values are flat-lining (meaning borrowing power is tepid) and interest rates on savings remain stubbornly low.
Not to mention college costs, which are skyrocketing. According to data from the Labor Department, the price index for tuition alone grew by nearly 80% between August 2003 and August 2013. For big families, college educations at private institutions — including tuition, room and board, books, fees, and transportation to and from home — might easily hit seven figures.
So how can people balance the education needs of their children with their own? “The first priority is to make sure that contributing to a child’s education won’t jeopardize one’s own financial security,” says Tracy Lamond, CFA, a registered principal who offers security and advisory services through LPL Financial, member FINRA/SIPC in Novato, California. “It might sound heartless, but really the best way to help your kids financially is to make sure you don’t sacrifice your home, your savings or your retirement nest egg.”
Here are a few things to consider:
Use 529s. This is a win-win: You gain a tax advantage while the money you squirrel away grows. Even modest monthly contributions can grow substantially if you start when your child is very young and dividends and interest are reinvested. What’s also interesting is that relatives (including grandparents and aunts and uncles) can contribute to a 529 as well, and get the same tax advantages as the parents.
Have your child assume student debt at low interest rates, and help with the payments. Some parents pay a portion of the monthly tab; others pay only the interest each month while the child whittles down the principal. This way, the debtor benefits from the discipline of paying back the loan, and has a start in building a solid credit history. The parents have a lighter monthly payment, haven’t taken on any more debt, and have more disposable income to fund their retirement accounts.
Look for alternatives to traditional college financing. Some students have had success enlisting friends and non-parental relatives — even some kind-hearted strangers — to help out with college costs by turning to crowdfunding websites.
Look into need-based financial aid. Even if your income is higher than the median — let’s say it’s $70,000 — if you have two children in college at the same time, your kids will likely qualify for need-based financial aid, whether at a private or public college. That means the children are eligible to receive certain grants, scholarships and student loans as part of their financial aid packages. (Just remember to figure out a strategy for paying off the loans too.)
Encourage your child to find paying internships. The money can help, yes, but there are other important benefits of internships. First off, the student will have job experience to put on a resume, which is especially important in the fields where there’s fierce competition for entry-level positions. Second, the students will be able to find a mentor in their field as they begin their careers. That’s invaluable. And third, they’ll get a clearer idea of whether they even want to pursue the career they thought they did.
Push your child to excel academically. Yes, those grades in your sophomore year of high school do count, not just to get into your college of choice, but also to qualify for merit aid (also called academic financial aid). Merit awards are typically grants, scholarships or discounts on tuition. In other words, the money doesn’t have to be repaid the way student loans do. More importantly for higher-income parents: Merit awards are based on GPA and standardized test scores, not on household income or assets. These grants vary widely from school to school, so do your homework, advises Robin Groelle, an independent educational consultant and founder of CollegeCounselling.com.
Get the paperwork for federal financial aid done first. It’s important to send it in before you apply for state grants, loans and merit aid, because all three are based on information submitted in the federal application, which is free, Groelle added.
Don’t do anything that drains your resources or makes them inaccessible. For example, don’t borrow against your 401(k); that money should stay 100% devoted to your retirement. Don’t take out a home equity loan to pay for tuition, either. If for some reason you can’t make a payment, you could put your home, mostly likely your biggest asset, in jeopardy. Then you’d have to face losing a home and not being able to help with a child’s college education.
Don’t limit college cost estimates to just tuition. Also factor in transportation, room and board and enrichment programs.
Don’t rely exclusively on high school guidance counselors for ideas and information about paying for college. Either invest in an independent college counselor, or talk to college- or university-based counselors, because they have the most current, pragmatic insight and experience.
Sending a child to college is a major investment. And like any other investment, it requires research, wise choices and frequent monitoring.
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