Neal Gabler wanted his two daughters to attend the best schools they could. Good students, both were admitted to prestigious private universities. But their education costs soon outstripped Mr. Gabler’s finances as a book author and freelance writer, and he turned to his own parents for assistance.blog_college_10182016

“In the end, my parents wound up covering the cost of the girls’ education. We couldn’t have done it any other way,” Mr. Gabler wrote in a story for The Atlantic Monthly published earlier this year.¹ “It meant that we had depleted not only our small savings, but my parents’ as well.”

While his experience may be extreme, participants across the country are dealing with similar situations. Your company’s retirement plan may be full of parents like Mr. Gabler—successful professionals with well-paying jobs who want their children to have the same opportunities they had, if not better. They want to raise happy, self-sufficient young adults, and how they choose to address this issue could impact their retirement savings. 

Earning a college degree has long been the pathway to independence. We know they make a positive difference. The Bureau of Labor Statistics shows the unemployment rate, as of June 2016, at 2.4% for Americans with a four-year college degree; for those with only a high school diploma, that rate increases to 7%.² College graduates also tend to earn significantly more money over their working lives. Yet some young Americans have mortgaged their futures to pay for their education. According to the U.S. Department of Education, we collectively owe $1.2 trillion in college loans.³ That’s more than is owed on all credit cards combined.

Many young grads say the debts they incurred in college now impede their transitions from students to self-reliant adults. According to a recent Pew Research Center analysis of 2014 U.S. Census data, for the first time on record, the most common living arrangement for young adults is living with their parents.This is a shift for Americans ages 18 to 34, who used to cite setting up house with a spouse or partner most frequently.

Too much of a good thing? 

Many students fall into debt without really comprehending the serious long-term consequences. Simply put, they borrow more than they can afford to repay.

From Mr. Gabler’s experience, we see how self-sacrificing parents can get in over their heads by taking out a second mortgage—or borrowing from their retirement plan—to pay for their children’s tuition and room and board. The high cost of college suggests the need for students and their parents to think about setting themselves a limit on borrowing.

Putting an economic value on college 

“This may sound cruel, but if you aspire to be a social worker or a painter, you probably shouldn’t borrow as much as a future dermatologist or investment banker,” said Lynn O’Shaughnessy, author of The College Solution: A Guide for Everyone Looking for the Right School at the Right Price.5

One rule of thumb is to limit total borrowing to one year of earnings in your future career. By this measure, a student who hopes to become a social worker might limit loans to $45,000, while a future dermatologist might borrow as much as $200,000.

If nothing else, linking the amount borrowed to future income might get students thinking harder about their career aspirations. It might also encourage a child—who may have never paid a bill before—to think twice before borrowing $100,000 for a degree that leads to lower-paying jobs.

Some of our own participants feel overburdened by their student loans, and we’ve heard their concerns. To help, in June, we added a lesson to our website called, “How do I handle my college debt?” It suggests some practical ways to lighten the load, including consolidation and loan forgiveness programs. We’ve also recently released some financial planning guidelines for tackling higher education expenses, which can help investors who have access to a variety of investment accounts when paying for college.

While student debt is a problem, there’s good news to celebrate as well. More young workers are joining their companies’ retirement plans than ever before. Fifty-seven percent of eligible employees under 25 had joined by the end of 2014, compared with 33% in 2006. And according to How America Saves 2016, plan participation reached 74% among those ages 25 to 34, compared with just 58% nine years ago.6

Give much of the credit for this development to the rise of automatic enrollment. (Its use has risen 50% since 2010 among plans administered by Vanguard.) Despite what they may be experiencing with college debt, many more young workers are placing a value on saving for retirement. And that’s a trend we can all applaud.

¹Gabler, Neil, 2016. The secret shame of middle-class Americans. The Atlantic Monthly.

²U.S. Department of Labor Bureau of Labor Statistics, 2016.

³U.S. Department of Education Federal Student Aid Portfolio Summary, 2016. National Student Loan Data System.

4Pew Research Center tabulations of the 1880, 1940 and 1960 U.S. decennial censuses and 2014 American Community Survey.

5 O’Shaugnessy, Lynn, 2012. The college solution: A guide for everyone looking for the right school at the right price, 2nd ed.,  FT Press.

6Vanguard, How America Saves 2016.

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