One of my first assignments as a junior actuary was to analyze a new program that helped students to afford college. It was a public-private loan program that varied students’ repayment responsibilities based on how much money they made after graduation. For each $3,000 borrowed, a student-borrower committed to paying the loan back with 1% of their earnings. So if four years of college cost $24,000, the student committed 8% of their earnings.
The loan had a market rate of interest and you kept paying until the balance was paid off.
If you had a well-paying job, you paid down the loan quickly. If you were teaching poetry to prison inmates, you might only pay off the interest and never repay too much of the principal. My job was to look at the “actuarial aspects” of the loan program and price the insurance cost of paying off the loan in the case of death, disability or unemployment.
That project has influenced my position on paying for college ever since. Essentially, I think students wherever possible should be responsible for their debt, within parameters that help them stay far from financial ruin.
Two goals: Pay for college and plan for retirement
I started thinking about that long-ago assignment when I read an article about parents nearing retirement who are helping finance their college-age children’s education. Many find themselves wondering whether they should pare back their retirement savings plan and put more toward college payments. Both are important and necessary, and it would be better if people didn’t have to make this kind of decision. But sometimes we do, and following are considerations if you find yourself in this situation.
Some student loan programs do tie repayment to wages, but as any parent or student knows, on top of worrying about how far your savings will stretch, the process is confusing and nerve-wracking. A broad public-private offering like the loan program above to help finance college would alleviate much of the pressure.
If you are already looking at a pile of debt that your child owes, he or she may be asking you to help pay it down so they can start their lives on a better financial footing. That would be great! As long as you don’t end up living in their basement and eating cereal for dinner.
Cashing in now or later
At this point, parents close to retirement need to get the most cash flow out of their retirement savings. Their decision might involve a decision for the kids, too: Do you want your money now or in the future?
Say you have $100,000 in savings and you are counting on $4,000 a year in interest and dividends to help finance your living expenses. You hope the $100,000 stays intact so you can leave it as a legacy to your children. But perhaps one of them asks for $50,000 to pay off student loans. You agree, but you are clear about the results of this decision: Your child is getting his or her inheritance now. There will be a smaller legacy in the future.
By the way, income annuities that guarantee cash flow for life allow you to help the kids and also keep your retirement plan intact. If you have savings that you expect can be left to your other children, you can buy an income annuity with the remaining $50,000 and receive about the same after-tax income as the $4,000 per year strategy would have produced.
If you’re like me, your children are your proudest achievement. You’ll do anything for them, and when you started a family a little later than your friends, you might have to make some tradeoffs that those friends don’t have to. Besides income annuities, retiring a little later, using all of the available resources and financial products, and minimizing taxes, can make a huge difference in your retirement income.
If you have questions about annuities and how they might help meet your retirement objectives, write to me at Ask Jerry.
Or if you’d prefer to do more research on your own, take a look at the useful tools and information we offer at Go2Income.com.