Lynnette Khalfani-Cox: 'You Can't Borrow for Your Retirement'

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The average annual tuition at a four-year public university was $22,000 (in-state) and nearly $37,000 for out-of-state students for the 2020-21 school year. Private college tuition was nearly $50,000. Yet as daunting as those figures are, many families recognize that getting ahead involves investing in education. Author and financial expert Lynnette Khalfani-Cox, a recent guest on Morningstar's The Long View podcast, has written several books on the topic of paying for college and managing debt. In this excerpt, she discusses how families can calibrate their education outlays.

Jeff Ptak: I wanted to go back to something you touched upon earlier, which is college funding and debt. You've written several books about paying for college. Higher education in the United States. is so expensive, and people can get into a lot of debt to cover it, as you alluded to, and yet, investing in higher education is practically a must for advancing in a career and accumulating wealth, which is something else you touched on. So how do you go about advising families on how to rightsize their educational spend, so they're not putting themselves in financial jeopardy to pay for education?

Lynnette Khalfani-Cox: One of the big things that I advise families and, of course, this means the students and the parents, is to think about the right-fit institution, and not just a brand-name institution. So many times people are willing to go into debt because it's their "dream college." And I can tell you, certainly, with my own kids I never let them use that language. I never let them think that it was, UCLA or bust, MIT or bust, or Duke or bust, or whatever somebody's "dream school" might be. I talked to them about finding the right fit for them based on academics, based on financials, and based on the college's own resources and what they would want to provide that would help them to advance into their career. So, I do think a lot of times families go into debt, because they're trying to get the name, they want to be able to wear that T-shirt and have little bragging rights, and so on. But that's not a reason to put yourself in financial jeopardy.

Christine Benz: How about parents going into debt themselves, tapping home equity, or taking out Parent PLUS loans, or tapping their retirement accounts? Should that always be marked with a skull and crossbones: Never do it? Or are there some instances where maybe you should think about it?

Khalfani-Cox: I wouldn't give a 100% no and say never do it. But I do think that it's a large and growing problem. I happen to be a money expert also for AARP, and I've done a lot of research into this area. Unfortunately, we're finding larger numbers of folks who are 50 and older and have student loan debt. And most of it is because they co-signed for their kids, but sometimes it's, what I call, second-act debt. Someone might have said I always wanted to try this, or I wanted to study this. So, they might have gone back to school for a graduate degree or left a certain job. Or got downsized from a job and then decided to go pursue some other career path for which they felt they needed more background in terms of education.

But I don't think that parents should put their retirements in jeopardy in order to pay for their kids' college education. The fact of the matter is, worst-case scenario, as a last resort, the student can borrow for college; you can't borrow for your retirement. I think that families need to be looking at all of the options that are at their disposal before they turn to loans. What are those options? It's scholarships, grants, paid internships for the student, work study, and the family's own resources. Once you tap all of those five things, then you should start thinking about where there are gaps: What's still necessary to be able to pay for college expenses, and now what loans might need to be taken on?

Ptak: There's currently a pause on federal student loan repayments until the end of this year. What should people with loans be doing to improve their financial positions in the interim, in your opinion, or does it completely depend on their circumstances and whether they're employed?

Khalfani-Cox: I do think it depends in large part on their financial situation. In general, what I'm telling people is keep paying, try to get ahead if you can, because the payments that you're making right now will help you to knock out those debts a little bit faster. And the interest rates are set to zero. It'll help them to be rid of the obligation sooner rather than later. However, clearly, if you're unemployed, or if you're struggling to make ends meet, then you probably need to take advantage of the pause in payments at the federal student loan level. We have tens of millions of Americans who owe--we're almost up to $2 trillion in student loan debt. So, this is a massive problem, but it is one that's nuanced, and different people have different circumstances.

I think that people should make sure that they're aware of all the federal student loan repayment options, because there's a graduated-loan repayment, income-based, and income-sensitive repayments, and so on. You should make sure that you're aware of all of the different types of loan repayments, because when you graduate, they stick everybody in the standard loan repayment program. And that's the one that you pay off your loans in 10 years. But, of course, it's the highest-monthly payments per month, and not everybody can swing that. That's the reason why so many people say "No, I'll do one of the graduated or extended loan repayment programs." They might stretch it out 15 years, some 20, some even 25, in order to make the monthly payments lower.

I caution people to just make sure that you're not adding all that extra cumulative interest over time, and certainly don't do what I did initially and put your loans on autopilot. I just had them sitting there. And I was just pretty much making minimum payments for a while. And then I looked around and said, "Why am I still paying on these loans? I need to get to more aggressively paying some of this stuff down."

This article was adapted from an interview that aired on Morningstar's The Long View podcast. Listen to the full episode.