New England College Costs Looming Large -- Avoid Expensive Mistakes

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Sending your kids to college in New England is particularly expensive. When families are pressed to dip into their retirement plans to pay college expenses for their children, they may be permanently damaging their own futures.

The National Center for Public Policy and Higher Education “Measuring Up” State Report Card grades Massachusetts an F in higher education affordability. This biennial report grades states in six categories, including Preparation, Participation, Benefits, Learning, Completion and Affordability. The good news is that Massachusetts received an A in the other five categories. “Even in the best-performing states, higher education has become less rather than more affordable when the costs of attending college are considered in relation to family income.” The middle class, which in Massachusetts tends to send their children to four year colleges, are sharing a heavy burden when it comes to percentage of income they are paying for their children’s education.

Here in Massachusetts, and similarly in all of New England, it is common for private colleges to cost $40,000 per year or more for tuition, room and board. An alarming trend to combat this is that parents are sacrificing their own retirement to pay for their children’s education. Parents also stop contributing to their 401k plans and forgo the company’s matching contribution. When a company matches 50% of employee contributions, that’s a 50% return on your money before any gain in your investments. Stop contributing and you lose big.

Another alarming trend is taking hardship withdrawals from 401k plans to pay for education costs. According to 401k hardship rules, you are allowed to take a withdrawal to pay higher education expenses. The damage here is twofold: 1) you will pay both federal and state income taxes, and 2) forfeit an alarming 10% penalty for early withdrawal. You will need to withdraw $16,750 to net $10,000 with taxes and penalty, assuming you live in Massachusetts and are in the 25% federal tax bracket. The long-term impact of not having that money available to fund your own retirement will cost you $78,073 twenty years later, assuming your 401k was growing at a hypothetical 8% annual rate of return. That may be a lot of retirement savings to sacrifice.

Parents need to weigh the long-term impact of budgeting educations for their children against their own need for financial security in retirement. First, understand how much more money you’ll need to have saved by the time you will retire. With an understanding of your likely expenses in retirement, when you will retire, and how many years you’ll probably live (actuarially) you can set a savings target.

Once you are on target for your own retirement savings, you can budget college savings and college costs each year. If you have under-funded your retirement, you may not like it. Are your prospects bleak for educating your children and funding your retirement simultaneously? You are not alone.

There is no magic elixir, but you will have a crystal clear picture given your multiple goals. By understanding the implications of funding one goal versus the other, it helps you put into perspective your choices between living for the present and preparing for the future. Adjusting spending and savings habits today will make more of limited resources. An ounce of prevention…

Christopher Lund, MBA, CFP®, CLTC has been working with families to educate their children and save for retirement for over 15 years. He lectures and holds workshops on college financial planning and retirement savings strategies in Eastern Massachusetts. Securities and Investment Advisory Services offered through Capital Analysts Incorporated: Member NASD-SIPC


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Christopher Lund, MBA, CFP®, CLTC
Lund Financial Group
508 618-1262
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