The educational system is designed to do more than just educate. It’s also a filtering system to regulate the influx of young people into the job market. Let me elaborate …

There was a time when a large percentage of the population didn’t go to school. From a young age, most children were needed to help out on the farms and in the fields, or with their families’ businesses. You could tell which families had some money because they were the people who knew how to read and write. Later, more public schools and a shift from agriculture to industrial work made it possible (and necessary) for more children to go to schools, but many never made it to high school, and only the wealthy elite went on to college to earn a degree. As time passed, high school became mandatory and college was far more common, yet a college education was still a privilege reserved for those in the middle and upper financial classes, who could afford it. Today, it’s tough to find a good job without a college degree, which makes going to college almost mandatory. And even if your children do have college degrees, they’re likely to lose out in their job search to those with master’s degrees or even doctorates. The bar keeps getting higher and so does the cost to keep up. 

This pressure to ensure that our kids have the prerequisite degrees to be competitive in the job market has led to some ill-advised financial decisions in the form of taking on our kids’ student loans. For those of you fortunate enough to be able to easily afford to send your children to college, student loans probably aren’t even an issue. But for those that don’t have an extra hundred thousand dollars or more lying around, this article is for you.

Many parents feel obligated to sign or co-sign for student loans so their children can go to college. And while this is a noble choice motivated by the best of intentions, in many cases it is creating so much debt that it is greatly affecting and even destroying people’s retirement plans. The trend of parents who are willing to jeopardize their own retirements to sign student loans is on the rise.

Obviously, the cost of a college education varies drastically depending on the school, but in general, securing a loan to pay for a college education today is comparable to signing a mortgage for the purchase of a house. I’m even seeing parents use the equity in their house to secure the student loan. 

Even if parents can afford the monthly student loan payments, the amount of debt can hamper their ability to make other smart financial moves. From the mortgage perspective, with the current regulations, student loans are frequently making debt-to-income ratios too high for loan qualification. Just recently, we were trying to help a couple refinance their mortgage – and refinancing would have saved them a lot of money! But because of their daughter’s sizeable student loan, they didn’t qualify. I’ve had more than one of my own clients in this situation say that in hindsight they wish they had not taken on the student loan debt.

I know what many of you may be thinking … that your child’s education is more important than your retirement, and signing a student loan is a sacrifice you’re willing to make. It’s a tough decision – you are forced to weigh the importance of your child’s education against the importance of the quality and security of your retirement. As I always say, every family’s situation is different, and you should consult with a financial expert as to your best course of action; but in most cases, there is usually a better option than signing a loan that could ruin your retirement and keep you buried in debt for the rest of your life.

Here are some alternatives and ideas to consider that may help you get your children through college without signing a student loan:

• First and foremost, start a 529 account early and be as consistent as possible in contributing to it on a regular basis. A 529 is a great investment tool. Even if you don’t save enough to cover the entire tuition, pay off what you can with it and figure out how to cover the difference in some other way – but don’t sign or co-sign a student loan if there’s any way around it.
• Let kids know early on what you can and can’t do for them. Have an intelligent conversation with them. Younger people have a tendency to be shortsighted – explain what this debt really means in terms of payments and the length of the terms.
• Let them know they may have to take on some or all of the debt.
• Encourage them to start working and saving early on – help them see the value in developing good savings habits.
• Encourage your child to seek and actively apply for scholarship and grant opportunities – there are more out there than most people realize.
• Encourage them to go to college in state, as usually it’s far less expensive than out-of-state tuition. Plus, it won’t cost them (or you) as much to take travel home to visit.
• Consider community college for the first couple of years followed by a transfer to a university to complete their degrees. Community colleges are much more affordable and almost all of the classes are transferrable to universities. Employees are far more interested in where students finished and received their degree than where they took the first two years of general education classes. In most cases, they will never ask and never know that a student began a higher education path at community college.
• If your child qualifies for a student loan, put it in their name and don’t co-sign for it. You can always still help to pay the loan, but you don’t want the debt on your financial records.