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How to Save for College and Retirement

By U.S. News & World Report

When it comes to saving for college, parents can use all the help they can get.

A 2016 study from T. Rowe Price that surveyed 1,086 parents across the U.S., reported that 62 percent of children expected their parents to cover the cost of “whatever college I want to go to.”

In response, 65 percent of parents told T. Rowe Price they’ll only be able to pay for “some college costs.”

No matter how much parents pay for college, there is a troubling trend bubbling up on the college savings landscape — using retirement funds to pay for a child’s college education.

[See: 9 Ways to Avoid 401(k) Fees and Penalties.]

Most financial advisors are against the practice. They rightfully point out that parents have many options to pay for school, but only constant, long-term savings can cover retirement needs. Plus, a child can possibly qualify for more college financial aid if a parent makes retirement savings a priority, as retirement funds aren’t factored into college financial assistance calculations.

All that begs a legitimate question: Besides starting early (way early), what are a family’s best options in covering both long-term savings needs?

Know what you’re up against. “Without hesitation, this is the most challenging financial planning issue my middle aged professional clients face, including myself,” says Stephanie Mackara, president of Charleston Investment Advisors in Charleston, South Carolina.

Although clients’ circumstances are different, Mackera says her advice is always the same: your first dollar of savings should be in your retirement account, preferably a 401(k) that has a match, next is debt repayment and finally is college savings.

“College savings is last on the list for many reasons because most people don’t consider that a portion of college costs can be paid out of cash flow during college years,” she says. “Do you get a bonus each year at work? Earmark those funds for college costs. For a spouse that has been out of the workforce, take on a part-time job to pay the college costs.”

If the college funds fall short, “your child can take out a loan and you can help him or her pay down the loan,” Mackera adds. “Retirement is typically 15 or so years away for most parents with children entering college, and saving for it must remain a priority. There are no loans for retirement.”

Lasting damage. Parents should also be aware of the financial damage done by raiding a retirement account to pay for college costs.

“People need to understand the value of compounding and that there is no substitute for time,” say Scott Stratton, a financial advisor at Good Life Wealth Management in Dallas. “Saving $5,000 in your 30s is equivalent to saving $20,000 in your 50s, given a hypothetical 7 percent rate of return.”

[See: 11 Tips for the Sandwich Generation: Paying for College and Retirement.]

Some see the issue from a different perspective.

“You’ll actually have more money for retirement if you save for college,” says Mark Kantrowitz, publisher and vice president of strategy at Cappex.com. “Otherwise, you’ll have to borrow for college, and the interest rates on debt are usually higher than the interest rates on savings. You end up with more money if you use savings to avoid higher-rate debt. It is literally cheaper to save than to borrow.”

“The only way arguments in favor of saving for retirement instead of saving for college is if one assumes that someone other than the parent will be repaying the loans,” he adds.

Kantrowitz advises taking the following steps to cover both college and retirement savings costs:

Max the match. Maximize the employer match on contributions to retirement plans, as that is free money.

Emergency fund. Make sure you have an emergency fund with half a year’s salary in it. This will help you manage cash flow better and provides a buffer to help you pay for living expenses during periods of unemployment.

Stay current. Make on-time payments on all debts, because that can affect your credit.

Target highest rate. Rank all savings and debt prepayment opportunities by after-tax interest rates, and apply excess cash to the opportunity with the highest rate. “Usually this will be high-interest credit card debt. But, be sure to cut up the credit cards, so you won’t be tempted to run up the balance again,” he says.

Open a 529. Save for college in a 529 college savings plan. “Consider plans with the lowest fees (under 1 percent), since minimizing costs is the key to maximizing net returns,” Katrowitz says. “Also consider your state’s plan, since several states offer a state income tax deduction or credit on contributions to the state’s 529 plan. Aim to save at least a third of future college costs, or the equivalent of the cost of a college education the year the child was born. That works out to monthly contributions of $250 for an in-state public college and $500 for a private college from birth through age 17.”

In addition, take full advantage of using rebating programs, like Upromise or the Fidelity Rewards Card, to earn extra money for college savings, Kantrowitz says,

[See: 13 Ways to Take the Emotions Out of Investing.]

Saving for both college and retirement is no easy task. But if something must give, exhaust all the financial aid options you can for college, and keep plowing money away for retirement no matter what.

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How to Save for College and Retirement 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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