College Costs Competing with Both Parents’ and Kids’ Retirement Savings

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college costs versus saving for retirementMany kids and parents face a dilemma as they grapple with paying for college while trying to simultaneously save for retirement, according to two new studies.    

According to T. Rowe Price’s 2019 “Parents, Kids & Money Survey” — which sampled 1,005 parents of 8- to 14-year-olds and their kids — many parents say college costs aren’t their responsibility and aren’t prepared to pay, but most kids expect them to cover the cost. 

On the opposite end of the spectrum, 84% of adults carrying student loans report that such loans are negatively impacting the amount they can save for retirement. This is according to research sponsored by TIAA and conducted by the MIT AgeLab. 

T. Rowe Price’s findings show that 42% of parents say it’s not their responsibility to pay for college, yet nearly 70% of kids believe it is their parents’ responsibility. Meanwhile, many parents will only be able to cover some college costs: 45% of parents say they will be able to cover some of them, 25% say they will be able to pay most costs, 19% say they will not be able to cover any and 12% say they can pay all expenses.

Many of those who are unable to cover the full cost end up tapping their retirement savings or postponing retirement in order to pay for their kids’ college. Paying for their kids’ college education was among the top reasons cited by the 26% of parents who admitted pulling money from their retirement savings in the past two years.

And in some cases, parents prioritize saving for college over retirement. T. Rowe Price’s survey further shows that 53% of parents say that saving for their kids’ college is a higher priority than saving for their own retirement. What’s more, 68% of parents agree with the statement, “I’d be willing to delay my retirement to pay for my kids’ college education.”  

The survey also found that more than one-third of parents are uncomfortable discussing saving for college with their kids and few of them are having frequent conversations about it. The lack of communication may help explain why there is a disconnect between kids’ and parents’ expectations about who foots the bill, the researchers note.

Student Loan Debt

The TIAA-MIT AgeLab further shows that 73% of borrowers report that they are putting off maximizing their retirement savings, saying they expect to begin or increase their contributions once their student loans are paid off.

Among those who are not saving for retirement at all, more than one quarter (26%) point to the need to pay off student loan debt as the reason.

The year-long study, which explores the intersection of student loan debt, longevity planning and family dynamics, shows that life stage plays a key role in the “balancing act” of paying off student debt and saving for retirement.

Among 25- to 35-year-olds who are not saving for retirement, nearly 40% say they are prioritizing student loan payments. And this doesn’t extend to just young adults. Of the parents and grandparents taking out loans for children and grandchildren, 43% say they will increase retirement savings once the student loan is paid off. In focus groups, women in particular described the struggle of sacrificing their own financial security in retirement in order to put their children’s education and wellbeing first.

Industry Solutions

Meanwhile, with studies such as these showing that many are struggling to save for retirement while paying off student loans, more companies are developing solutions to help address both goals.

One of the latest is Fidelity Investments, which announced that it is working with The Travelers Companies and Raytheon to offer their employees a new benefit designed to help eliminate the student debt burden, while also building savings for retirement.

Under Fidelity’s Student Debt Benefits program, employers will allow payments made by eligible employees toward their student loans to qualify for the company’s contribution to that person’s company 401(k) plan. As such, if an employee is making monthly student loan payments, to help them save for retirement at the same time an employer contribution will be made into a Fidelity retirement account.

Both companies have announced they will start allowing employees to enroll in their respective programs this fall, with the benefit going into effect starting in January 2020.

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