Workforce Trend: Parents Are Risking Their Retirements to Pay for College for Their Children
When it comes to their kids, many of your employees may be willing to put their retirement on the line.
As HR pros focus on workforce planning, understanding the burden that college costs impose on most employees is a key component for successful financial wellness programs.
When it comes to paying for college, even financially savvy parents can become overwhelmed and confused by the college financing process. That’s where employer-sponsored education efforts can help. Employers who understand the following common college financing traps can better plan programs to alleviate the stress of paying for college and improve financial wellness overall.
Trap One: Prioritizing Their Children’s Education Over Their Own Retirement
By now, it’s become a financial wellness mantra. Employees should prioritize their retirement savings before saving and paying for their children’s college educations. After all, the thinking goes, your employees and their children can borrow for education costs, but they can’t borrow to pay expenses during their retirement years. And if parents don’t properly prepare for retirement, their children may end up supporting them in their later years, jeopardizing their financial future.
But with ever-rising tuition costs and the increasing burden of student debt, it may be harder for your employees to follow that tried-and-true advice. Almost 45 million Americans owed a collective total of $1.7 trillion in student loan debt in 2020, according to research from credit reporting agency Experian released in April 2021.
Trying to ease the burden on their children, your employees may be raiding their future. Parents withdrawing funds from 401(k)s and IRAs rose to 14% in 2020, according to a 2020 survey from Sallie Mae and Ipsos, up from only 6% in 2015.
Another consequence of the college cost burden can be more employees delaying retirement in order to pay off college loans or to catch up on missed retirement savings. Either way, employers can see increased costs associated with delayed retirement. For instance, according to a 2019 survey from Prudential, it may cost an employer over $50,000 for an individual whose retirement is delayed by one year. Also, if paying for college forces employees to work longer than they want to, the result may be a less productive, less engaged worker.
Trap Two: Mismanaging PLUS loans
Parent Loans for Undergraduate Students (PLUS loans) are underwritten by the federal government and allow families to borrow without the same credit checks and other limits imposed on other types of lending. Because these loans are in a parent’s name, your employees may naturally gravitate to them as a way to help their children avoid debt.
But there are drawbacks. Unlike federal student loans, there are no limits on the amount parents can borrow as long as it doesn’t exceed education costs. To qualify for a PLUS loan, parents need only pass a check for an “adverse event” such as a recent bankruptcy filing or foreclosure. There is no consideration of the borrower’s ability to repay the loan. Given the often astronomical costs of attending a four-year college, your employees may quickly find they have taken on more debt than they can comfortably handle.
In addition, PLUS loan interest rates, set by the government each year, are usually significantly higher than student held federal loans (6.28% for 2021-2022 versus 3.73%) and sometimes higher than some private college loans.
If parents default or consolidate their PLUS loans, or if they receive a forbearance or a deferment, the interest that continues to accrue is capitalized. That means that principal and payments can become even more unaffordable for employees. In addition, if the loans go into default, the government can garnish wages, Social Security checks, and tax refunds.
Trap Three: Avoiding College Financing at All Costs
Another common mistake lurks on the opposite side of the spectrum. In an effort to avoid college debt of any kind, parents who have some, but not enough, college savings may decide to forego or dip into retirement savings or use home equity to pay tuition bills as they come.
Withdrawing 401(k) savings can result in onerous penalties, taxes, and, importantly, lost principal and earnings. Cash-out home refinancing can lead to higher and perhaps unaffordable mortgage payments. Even putting retirement savings on hold when the year’s tuition is due can translate into large gaps in savings goals, depending on the number and ages of children attending college.
These are all understandable mistakes. As we saw above, an overreliance on debt to pay college bills can seriously jeopardize financial wellbeing. But so, too, can dismissing the strategic use of financial aid and loans to finance college costs.
For instance, your employees may neglect filling out the Free Application for Federal Student Aid (FAFSA), figuring that they earn too much to qualify for federal financial aid. According to the Sallie Mae/Ipsos survey, 71% of families filed the FAFSA for the 2019-2020 academic year, down from 83% two years earlier.
These parents may not realize that without the FAFSA, the student will not be awarded federal subsidized and unsubsidized loans, which can be attractive for their low rates and, in the case of subsidized loan, deferred interest. Nor, will parents have access to PLUS loans.
More importantly, many schools require students to submit a FAFSA to be eligible for merit-based scholarships and grants, even though these funds are awarded according to the student’s academic record and other achievements, not financial need. Merit-based aid does not have to be repaid and is usually awarded to undergraduates for the full four years.
While too much debt is never smart, a prudent and affordable mix of well-structured student debt can help parents avoid sacrificing retirement savings, home equity, and other long-term savings to pay for college now.
Employer-sponsored college financing education and one-on-one college counseling can help ensure parents understand the complexities of financial aid and student borrowing so they can balance long-term and current financial needs and goals.
Employers who help parents avoid these common college financing traps may help alleviate what is fast becoming one of the largest sources of financial stress in your workforce. SoFi at Work can help with student loan repayment platforms, extensive education efforts, a parent hotline and a lending suite of student, graduate student, MBA and parent loans.For organizations that are looking to help their employees get ahead on their education financing goals, SoFi at Work also offers a 529 College Savings Program, which can be integrated into any payroll system.
Photo credit: iStock/Orbon Alija
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