College and Retirement Saving Can Mix — Carefully

It's a tough balancing act for sure. Here are some tips

By Marc Bastow, InvestorPlace Assistant Editor

Back in August, my InvestorPlace colleague Alyssa Oursler, a recent college graduate, asked a pertinent question: Is college worth it?

The answer was generally based on the experience of  Generation Y members (ages 19 to 30), and so far it seems to be no. After all, the most commonly held jobs today for Gen Y alumni are in retailing, with an average annual salary of around $19,300.

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Indeed, the biggest long-term concerns for Gen-Y’ers is that their salaries and future prosperity may not be adequate for paying back their college loans, a situation that has a direct impact on an entirely different generation — the baby boomers.

Whether you’re already retired or are heading into the critical years before retirement, college costs are an important part of your planning. And based on some new data released by the College Board, it’s vital to pay really close attention. With the college application season in full bloom, now’s a good time to talk about it.

According to the College Board, tuition hikes and a general increase in expenses drove college costs to dizzying heights during the past year, with in-state public colleges in 2012-2013 now costing just over $22,000 a year, as reported by CNNMoney. Of that $22,000, around $8,600 represents tuition costs.

And of course, the numbers are far more significant, and scarier, for private schools. Their average price per year for tuition and fees is now just north of $43,000. That’s right: nearly $172,000 for a traditional four-year degree!

Now, federal loans, grants and subsidies, and in some cases straight-out bank loans (sold off, of course, to government-sponsored entity Sallie Mae), are available, as are monies from the colleges themselves through grants, scholarships and subsidies. However, in many cases students look straight to mom and dad for a little help.

So, the biggest questions for the baby boomers are: How much of the costs to carry, and how much to budget for them? It’s a conundrum — and it affects your long-term retirement planning.

With any luck (or smarts), retirees started planning for their children’s education a long time ago, either by putting funds into a variety of investment vehicles, including 529 Savings Plans, U.S. Savings Bonds (EEE) offered directly through the U.S. Treasury or just plain old baskets of stocks, bonds or mutual funds. So far so good if that’s been your plan.

But if not, caution and a long conversation with your children about their expectations are in order. Remember: At some point you’d like to retire, and taking on debt associated with a college education can be burdensome over a long period of time.

Here are three tips to help inform that conversation, depending on how close your child is to college:

1) If you haven’t already started saving in any meaningful way, try to do so: Dividend-paying stocks like Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG) and Microsoft (NASDAQ:MSFT) will help generate cash while providing a long-term safe haven for your money.

Check out exchange-traded funds, too. Solid long-term corporate bond funds like iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD) or a long-term government bond fund like iShares Barclays 20+ Year Treasury Bond (NYSE:TLT) are good ways to start the process.

Buying corporate bonds directly from the like of AT&T (NYSE:T) and IBM (NYSE:IBM) is also a nice way to build a solid floor for savings with stability and a strong level of safety.

2) If savings are slim and you’re now getting closer to having a college student in the fold, it’s well worth talking about the community college alternative, if for nothing else than to get it out in the open.

According to the College Board’s Trends in College Pricing 2012 and Trends in Student Aid 2012 reports, the total costs of public (in-state) two-year colleges comes to around $15,500 per year. That two-year saving versus four-year school costs adds up to nearly $14,000.

3) State schools, regardless of whether they’re two- or four-year colleges, are an outstanding way to help keep you and your future alum out of potential massive debt. A close friend of mine let his three children know they could go to any school they wanted, as long as it was a (Maryland) public college, unless they managed to find a scholarship somewhere else. All are now proud graduates of the public college system — and are doing just fine.

Remember: It’s your life, too, and a plan to retire has to include a rational way to manage your children’s educational expenses.

Marc Bastow is an Assistant Editor at InvestorPlace. As of this writing, he’s long MSFT.

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