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Is the ever rising cost of higher education harming the retirement savings of parents? The evidence from the US in particular, suggests that helping children through college is having a detrimental effect.
Last month, The National Center for Policy Analysis in the US released a study based on data from the Bureau of Labor Statistics. The research explored the spending habits of the baby boomer generation; comparing the spending of the 45-54 and the 55-64 year old groups now and 20 years ago. The results showed that spending on education had seen the biggest increases, up 80% for the 45-54 age group and 22% for those 55-64 years old. This was caused by the over 40s helping their children pay either directly for education or helping to repay their own student loan accounts.
Education costs can put a tremendous strain on a family budget. The rise in education costs have consistently outpaced income increases for many years now, a trend that looks set to continue for the foreseeable future.
In the US, the average annual cost for tuition and accommodation for an undergraduate studying for four years in 1980-81 was $3,499; in 2010-11 the average cost was $22,092. However, the rising cost of education is not just limited to the US. The latest Consumer Price Index report from the Irish Central Statistics Office shows a year-on-year increase in education costs of 9.6%. In the UK, the government raised the cap on university tuition fees allowing for significant increases in education costs for UK students. Universities are now able to charge up to £9,000 in tuition fees. Whilst nationals of Scotland and Wales can expect financial support for any fees over £3,465, the average annual tuition fees at English universities are now £8,385. Overseas students, of course, can expect to pay much more than UK citizens and most expat children are subject to the overseas rate.
The temptation for parents to dip into retirement savings to help with their children’s education is natural, but comes with an often unrecognised cost. The viability of funding education from money that should be going towards retirement saving is questionable on several levels. Students can take out a loan to pay for their education but there is no corresponding loan facility to help the retired. The cost of a student loan, although significant, does not compare to the damage that can be done by withdrawing savings from a pension fund.
The best solution is one that is planned and executed as early as possible. Planning for education fees at as early a stage in life as possible can remove the significant burden that education costs will place on a family budget. Good financial planning can and should account for both education costs and retirement savings.
A specialist education fees plan can also be supported by payment protection plans for a solution with complete peace of mind. Lump sums, regular savings or other assets can be used to build up a fund to cover future education costs. Education fees plans are an excellent way to start saving early and plan towards paying education costs without dipping into taxed income.
At Infinity, long-term financial planning is the core of our business and our professional consultants are experienced in creating solutions to provide for education costs for both higher education and private schooling. Contact us today to discuss your education fee planning needs with one of our advisers.
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