Parents May Be Mismanaging Student Debt with Serious Future Impact

According to a recent survey by Citizens Financial Group, 58% of parents report being worried they may not be able to retire when they want to due to their child's student debt.

Almost 61% of parents said their financial future would be placed in jeopardy if they were to invest in their child's education.

CFG, a banking company based in Providence, Rhode Island, commissioned the study which consisted of 5,000 people. Survey participants included both parents of children aged 15 to 24, as well as people age 18 to 34.

Nearly half of the surveyed parents say they have a plan to pay the child's debt. "They don't see it as a sole obligation to repay the debt but more as a joint obligation between them and the kids," said John Rosenfeld, who is in charge of retail deposit and banking products and services at Citizens.

Of the participants aged 18 to 34, 63% said they currently have a plan to pay off and/or manage their debt.

People who have defaulted on their student loans create the fastest growing group of troubled borrowers. Since 2009, when the amount of seriously delinquent student loans totaled $13 billion, the number has almost doubled to $25 billion.

According to a separate study by Sallie Mae, "How America Saves for College 2014", 55% of families in America are making a regular effort to save for their child's college education. Of that number, 18% plan on using their retirement savings to help pay. That number is up from 17% in 2013, when on average, parents withdrew around $3,256 from their retirement funds for their child's college expenses.

"Parents do this because they love their children, and they see it sequentially: College now, retire later," said Robert Fragasso, CEO of Fragasso Financial Advisors, Downtown. "It's an emotional reaction. They don't consider the fact that they could run out of time."

Financial advisors suggest parents do not dip into their retirement savings to help their children, no matter how much they may want to. Instead, children should be taking out loans on their own to pay for their schooling, as they have more time to pay it back.

"Unless the accumulated retirement savings are clearly more than the person is ever going to need, I generally advise against using retirement savings to pay for a child's college education," said David Walters, a financial planner with Palisades Hudson Financial Group in Portland, Ore. "You can usually borrow to finance a college education, but no one is going to loan you money to fund your retirement."

The Sallie Mae study suggests, instead, to begin saving for your child's education early. If a parent saves just $200 a month for 10 years they will end up with $34,400. However, if that lump sum were to be borrowed as a loan and paid back over 10 years, that parent will end up spending twice as much as monthly payments will average around $390.

To combat the issue, the Obama administration has suggested implementing loan forgiveness programs that would put a cap on the monthly payment and offer forgiveness on any remaining debt after 10 to 20 years.

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