Your new graduate put in years of hard work to earn a degree, but it may not have been without your help.
In 2015, parents paid nearly one-third of the cost of college out of their own pockets, according to Sallie Mae’s “How America Pays for College” survey.1 While the college bill varies depending on the school, the College Board reported annual undergraduate tuition plus room and board at a private four-year college was nearly $44,000 for the 2015-16 school year.2
Now, your child has graduated. Your contributions to a 529 college savings account are out of the way, and you’re no longer footing the bill.
This leaves you with more cash flow on a monthly basis, which means you can reprioritize your finances, and determine where it makes the most sense to invest this newfound money.
While everyone’s financial situation is different, there are three things all parents of college graduates must consider reviewing: your safety net fund, debts, and retirement accounts.
Fund Your Safety Net Goal
Do you have enough money saved to cover an emergency?
According to a recent Federal Reserve study, 47% of Americans would be unable to come up with $400 to cover an emergency expense and would resort to selling something or borrowing money.3
Now that your child has graduated from college, take this opportunity to revisit your own safety net fund.
This is a pool of savings to be used in case of emergency, such as a temporary loss of income, unemployment, medical expense, or home or auto repair.
While you may think that emergency funds are best held in cash, consider that these funds can also be put to work and earning returns for you.
Beyond your regular checking account and monthly outflows, any “idle” cash that is not invested can hurt your overall financial plan in two ways: It’s earning minimal (if any) returns and, over time, it can lose value due to inflation.
Even with your emergency savings, a low-risk investment in a taxable account can help provide potential upside while minimizing chances for losses over time.
If you don’t already have a target amount for your emergency needs, consider that the amount should cover your necessary monthly expenditures, such as housing, utilities, transportation, food, and healthcare.
The number of months you will require in emergency funds will range depending on your personal situation. For example, in case of income loss due to unemployment, you may wish to save several months’ worth of expenses to cover the time it could take you to find a new job.
Pay Off Debt
Take a hard look at your debt. Start with your most expensive debt, which is usually in the form of credit card debt.
The average annual percentage rate (APR) today is more than 15%, and the majority of Americans carry credit card balances month to month.
Now that your child has graduated from college and is entering early adulthood, his or her independence may represent additional cash flow that can eliminate those expensive unsecured debts.
Refinance Education Loans
Nearly 40% of families—either students or parents—borrowed money to pay for college last year, according to Sallie Mae.4
If you borrowed money for tuition with a Parent PLUS loan, you are eligible to refinance your federal loans once your child is within six months of graduation. Keep in mind that repayment for deferred Parent PLUS loans begins six months after a child graduates. According to data from student loan refinancing company Earnest, the average amount of debt refinanced by a parent for their child’s education is $68,000.
Additionally, use the post-graduation period to talk to your child about loan repayment. If you helped your child borrow money for college by co-signing on a loan, consider whether you want to resume your responsibility for the loan, or discuss working together toward a co-signer release.
Some lenders may release co-signers after a certain number of payments have been made on time and if the primary borrower’s loan is in good standing.
Remember, as a guarantor you’re liable for payments if your child cannot make them in a timely manner, and your credit will be affected if the loan goes into default.
Assess and Improve Retirement Savings
Empty nesters in their 50s or 60s are in their peak earning years, which makes it a great time to accelerate savings, says Charles Ellis, author of “Falling Short: The Coming Retirement Crisis and What to Do About It.”
If you have questions about how much you should be saving and in which types of accounts, Betterment’s retirement calculator can help you run your numbers.
RetireGuide, Betterment’s retirement planning tool, can also tell you how much you’ll need to save for a comfortable retirement. The tool takes into account your current lifestyle, compared with current and hypothetical future income such as Social Security and investment income.
For those age 50 and over, IRS rules state that you are allowed to contribute an extra $6,000 per year to your 401(k) in addition to the standard $18,000—for a total savings of $24,000. Add to that a maximum contribution to an IRA of $6,500 per person for a total of $30,500 in tax-advantaged accounts each year.
If you have a high–deductible health plan, another place for extra savings is a Health Savings Account, or HSA. In 2016, a family can contribute $6,750 per year in an HSA with an additional catch-up contribution of $1,000 if you’re over age 55.
Set Financial Expectations With Your New Graduate
Talk to your child about what’s next financially. Will your support taper slowly, or will it come to a complete stop on a certain date?
For example, some milestones can help represent when children will take over certain financial responsibilities. You can use birthdays, seasons, or the start of a new year for when your child is to take over insurance, bills, or loan payments.
If moving back home is also a possibility for your child, then setting your expectations for rent and household costs is a must. He or she is not alone, as nearly one-third of young adults live at home, according to a 2015 Pew Research Center report. However, if you’re trying to plan around how long your child might stick around the nest, consider his or her degree. History majors are much more likely than computer science majors to return home right after school.
1http://news.salliemae.com/files/doc_library/file/HowAmericaPaysforCollege2015FNL.pdf, p. 7.
3http://www.federalreserve.gov/econresdata/2014-report-economic-well-being-us-households-201505.pdf, p. 1.
4 http://news.salliemae.com/files/doc_library/file/HowAmericaPaysforCollege2015FNL.pdf, pg. 16.
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