Retirement Fund Withdrawals: How Parents Are in Debt from Their Children’s Education

While college wasn’t critical for everyone the 1950s, in today’s society, a college education is almost a prerequisite for landing a job. This is because a college degree — no matter what it’s in — opens doors and provides contacts that savvy college-goers can utilize. However, a large number of parents and grandparents are putting themselves into debt to finance college educations, and this means they have less money available to look after themselves for retirement.

College Debt Loads

Approximately 68 percent of student loan borrowers age 60 and older carry that debt due to children and grandchildren starting college, according to an analysis carried out by the Consumer Financial Protection Bureau. Many of the true beneficiaries of the education aren’t helping parents or others make repayments, with 39 percent making no payments and another 20 percent only occasionally making payments.

This creates a major problem when you’re planning for retirement. The level of debt makes it hard to add money to a 401(k) or an IRA, and with the forthcoming planned changes to Medicare, Medicaid and general health insurance, it’s now more vital than ever before that you have your finances in order before you decide on retirement.

In some cases, parents are removing money from a retirement account, so it stops accruing interest, and there is often a charge for doing so. Older borrowers may also default on federal student loans, leading to collections that impact up to 15 percent of their Social Security benefits. This can reduce their benefits below the poverty guideline after the offset, and for some, it takes them even further below the poverty threshold than they already were.

Even worse, Parent PLUS loans are relatively expensive, compared to Direct Unsubsidised loans, for example. For the former, interest rates can be above 6 percent, while for the latter, interest rates are often below 4 percent. This puts additional strain on parents.

Reducing Parent Debt

Such loans can be refinanced by the children, potentially taking advantage of low-interest rates and moving the burden of payment onto a child who has a successful career. As interest rates rise — and there are expected to be at least two more Fed rate rises in 2017 — the cost of servicing such loans will become more prohibitive. Refinancing before rates increase might be a good way to move the burden of debt to the person who actively benefits from it.

Preventing Parent Debt

However, it’s usually better to avoid financing your child’s education entirely if it means sacrificing your retirement. Loan rates are often better for undergraduates than they are for parents, and paying attention to financial matters may ensure your children take hard looks at whether they are working on the right degree and for the right reasons.

Planning ahead financially is also a vital part of ensuring your child’s future. A well-managed portfolio of investments that include stocks, shares and commodities such as gold can provide adequate income so that when your child is ready to go to college, you have the funds to help them through.