This moment likely has been 12 or 13 years in the making. You ensured that your child had access to the best education you could afford, took the right classes, and engaged in extracurriculars, sports, and volunteerism.
The journey has been very important, and all of it has led to the college application process and starting to think about where your child would like to go, and what the right fit might be.
The admissions process is such an exciting time for you and your child! This is the time that you have been planning for as long as you can remember.
College Tuition vs. Saving for Retirement
But now a different kind of issue looms on the horizon: you and your co-parent have to figure out how to pay for it.
The Burden of Student Debt
We all know how expensive going to college is these days and the burden that student debt creates on young college graduates. No parent wants their child to suffer under a mountain of debt as they begin their working life.
Divorced couples experience an additional challenge in this situation. Often, how to pay for college was not addressed clearly in their settlement agreement, which means they have to navigate this challenging territory together, sometimes many years after being divorced, and as adults getting closer and closer to retirement age.
While much of my practice regarding children concerns negotiating or litigating custody and child support issues, my involvement does not end there. I spend a surprising amount of time as a matrimonial and family law attorney and Certified Divorce Financial Analyst® (CDFA®) dealing with one of my client’s biggest issues: spending funds that should be earmarked for retirement to pay for their children’s education – all in the service of not disappointing their child.
Ideally, you and your co-parent worked some or even all of this out before your child got to this point. Perhaps you both agreed to contribute to a 529 Qualified Tuition Plan in proportion to your incomes in your divorce agreement and your child’s college tuition – and possibly even room and board – are covered. If so, congratulations!
However, even if you did make such an agreement, your financial circumstances could have changed since you got divorced, and you now might be considering putting money that was earmarked for retirement towards paying for college tuition. Here’s my best advice: Don’t do it!
“On average, a parent covering a child’s living expenses for five years and borrowing money for college tuition is missing out on $227,000 – almost a quarter of a million dollars – in retirement savings.” That was among the findings of a July 2020 NerdWallet study, which includes a calculator you can use to break down the monthly contributions you make to your children by category and see what the real cost will be to your retirement.
The Perils of Parent Plus or Private Loans
One specific issue that comes up frequently is taking out Parent PLUS or private loans for college. Unlike other types of federal student loans, Parent PLUS loans have virtually no limits when it comes to borrowing. This lack of limitation is financially dangerous as you could easily take out more loans than you could afford to repay – or you could end up using retirement income to pay back what could turn into a 10-25 year loan.
Private loans are also an option, particularly if you have good credit, but the same issues apply.
Without a 529 Plan (or having set aside considerable funds for college over the years), you’ll have to work together with your co-parent to figure out the best solution to pay for your children’s education: perhaps a combination of private funds, student loans, and parent-paid loans.
Student Loans vs Parent Loans
The student should take out as much money as possible in his or her name before parents resort to taking out loans personally; loans to students have lower interest rates and typically a longer pay-off period.
This is particularly important if taking on this debt will severely impede one or both parents’ ability to save for retirement.
It is also critical to be smart about how much debt you or your child takes on, as student loans are difficult (although not impossible) to discharge in bankruptcy.
Parents often jeopardize their own financial future for the sake of their children because they love them, but it’s not that simple. Some of the motivations include guilt over the divorce, fear of losing the child’s love if the previous standard of living is not maintained, or the desire to achieve “most favored nation” status and be the preferred parent.
The main takeaway, though, is that protecting your own interests does not indicate a lack of love – in fact, it sets a prudent financial example.
Remember: you need to put on your oxygen mask first before helping others.
And believe it or not, in the long run, your adult child may be very happy that you are self-sufficient financially and not reliant on them for support later in life. Particularly as they are figuring out how to support your grandchildren and put aside funds for the next generation’s college days.
Lisa Zeiderman (JD, CDFA®) is a managing partner at Miller Zeiderman LLP and a Founding Member of the American Academy of Certified Financial Litigation. With offices in Manhattan and Westchester County, Lisa practices in all areas of matrimonial and family law. www.lisazeiderman.com