One place mass affluent parents are less likely to look for funding their children’s college education is from their retirement savings. In fact, only 22 percent of mass affluent parents (those with $50,000 to $250,000 in investable assets) who saved or are saving for their children’s college education said they would be willing to cut back significantly on their retirement savings to pay for their children’s college, according to the latest Merrill Edge Report. As mass affluent parents continue to prioritize their retirement savings, many are instead relying on student loans (37 percent), scholarships/grants (36 percent), and state and/or federal financial aid (26 percent) to fund their children’s college education.
“Today, many mass affluent parents are in a unique financial situation – they are working to balance saving sufficiently for retirement, while also contributing to their children’s college education,” says Aron Levine, preferred banking and investments executive at Bank of America. “It can be an intimidating task, but parents should plan ahead to help make their retirement goals a reality as well as utilize other financial resources early on to help their children pursue their educational goals.”
Understand your entire financial picture and create a financial roadmap
When beginning to think about the cost of a child’s college education, mass affluent parents should take a look at their entire financial picture. From mortgage payments to retirement savings goals, considering financial priorities will help mass affluent parents determine how much they are able to contribute. They should also consult with a financial advisor or utilize a streamlined investment platform, such as Merrill Edge, to gain a better understanding of their finances.
Parents will also want to estimate how much college will potentially cost and what they can realistically afford. To do this, they can take advantage of several online tools, such as Merrill Edge’s College Planning Tool. Additionally, mass affluent parents need to determine what they already have saved. The 2013 Spring Merrill Edge Report shows that half (51 percent) of mass affluent parents who have or will save for college have saved just $20,000 or less for their child’s college education. With yearly in-state tuition rates climbing to more than $22,261 for the 2012-2013 academic year, according the report 2012 Trends in College Pricing by The College Board, current savings will likely only cover the tuition bill for freshman year. Once parents have assessed their entire financial picture on their own or with a financial advisor, they should create a Financial Roadmap to help them stay on track to pursue their goals.
Consider alternative financing/savings opportunities
Today, more than half (56 percent) of mass affluent parents are not personally willing to incur debt for their child to attend the college of their choice. As tuition rates continue to skyrocket, parents will want to start saving as early as possible and explore alternative options to pay for tuition. To start, they might consider opening a 529, UGMA (Uniform Gifts to Minors Act), or other education savings plan in their state.
One-quarter (24 percent) of mass affluent parents who are saving for college and who have children younger than 18 are not confident they will reach their target savings goal by the time their child is ready to go to college. That means many families will turn to financial aid and student loans to cover tuition costs. With 37 percent of families planning to utilize student loans, it’s vital for parents to educate their children on the financial responsibility of student loan payments and the potential financial impact they could face post-graduation.
Cutting back to save more
As increasing tuition bills become a reality, it’s essential for parents to also increase their amount of savings. While few are willing to cut back on important financial goals like retirement savings, more are willing to scale back on personal luxuries including a new car (51 percent), family vacations (43 percent), and a new home (42 percent).
Sixty-five percent of mass affluent believe that the cost of a college education is worth their return on investment. By planning ahead, saving earlier, utilizing financial resources and offerings, and cutting back on personal luxuries, today’s mass affluent parents can work towards their retirement savings goals, while also helping their children receive a college diploma.