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Back to School: Should You Fund Her Retirement or College?

By U.S. News & World Report

Parents often share the common financial goals of wanting to own a home, educate their children, and to retire comfortably. When it comes to their children, parents want the best.

Traditionally, parents want to help pay for their children’s college education and send them out into the working world armed with a degree. Today, with the ever-increasing cost of college, some parents are re-evaluating where to direct their hard-earned dollars to maximize the benefits for their children.

For an example, one couple was intent on investing a lump sum of money toward their daughter’s future; however, they weren’t sure that paying for her college tuition was going to be the best way to do that. They discussed with a financial advisor some common financial investments parents tend to make in their children including a college education, paying for a wedding, helping with the down payment for a first house, and even retirement.

[See: 7 Stocks to Buy for the Fourth Quarter.]

They had already planned for their own retirement and had just received $100,000 via inheritance. After watching others struggle in retirement, providing a dignified retirement for their daughter was of particular interest to them.

These parents understood the powerful impact that time and compound returns have had on their own retirement portfolio. It sparked an interesting thought: “Rather than put the $100,000 toward paying her college tuition, what kind of impact would over 40 years of potential compound returns have on our daughter’s retirement plan? Especially so, if we were able to help her aggressively save for retirement in her early 20s and have the money grow tax free?”

While their daughter is in college, the $100,000 could be invested in a taxable account with an allocation designed for growth, based on a retirement date over 40 years away from when their daughter would start working.

Upon graduation, when their daughter joins the workforce, they could begin using these funds to supplement her income. They would make an agreement that their daughter would make the maximum annual employee contribution ($18,000 in 2016) each year to an after-tax Roth 401(k). Their daughter would contribute to her Roth 401(k) via payroll deductions and then her parents would reimburse her dollar-for-dollar. This way she may still live on her full paycheck.

The logic for the Roth 401(k) being that their daughter’s income would likely be lower early in her career, making her after-tax contributions that grow tax free for retirement, especially beneficial.

[See: 6 Strategies to Avoid Working in Retirement.]

By repeating this process each calendar year, until the funds are fully invested into her Roth 401(k) and assuming a 7 percent hypothetical annual rate of return, the balance may grow tax-free to $1.5 million over the next 40-plus years. A potential $1.5 million-plus retirement nest egg without their daughter ever making another contribution toward her retirement illustrates the benefit of starting early and the powerful effects of time and compound returns.

The opportunity cost, of course, is that their daughter would need to take out student loans to pay for college. While many students are burdened with college debt, her parents felt that by taking an active role in educating their daughter about her finances and teaching her how to pay down her student debt from her own income would be a valuable life lesson. Learning to live within your means while paying down debt is a reality for many of today’s college graduates.

By making a concerted effort to improve their daughter’s financial literacy, and by including her in regular financial planning meetings, her parents hope that the strategy to save for her retirement will be more likely to have a successful outcome.

Their daughter would need to be on board with the plan over the long run, considering the possibility that a 20-something year old might be tempted to liquidate or raid a substantial retirement account.

They are also evaluating additional options that may include funding a Roth IRA for their daughter just as soon as she has earned income from a part-time or a summer job.

[Read: How Will Robo Advisors Impact the Future of Investing?]

Ultimately, by teaching their daughter about the benefits of planning to save and invest for the long term, her parents offer their daughter the gift of her first steps on the path to financial freedom in retirement.

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Back to School: Should You Fund Her Retirement or College? originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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