Why Not to Use Your Retirement Funds to Pay for College

Why Not to Use Retirement Funds for College Expenses

If your son or daughter is in high school, you're probably growing concerned about how you'll foot the bill for college. At the same time, you're saving for retirement. As college costs soar, many well-meaning parents are tapping their retirement savings to pay for their child's dream college.

It's often an emotional experience when a child is applying for college. Of course, parents want the best for their child, including the best college their child can get into. Parents may also have an unrealistic goal to fund a specific percentage of their child's education. Whether the goal is to pay for 50%, 75% or 100% of the cost, it's important to be realistic about what is really possible.

While it's a worthy goal to be able to send a child to college debt-free, using your retirement money or sacrificing your retirement contributions to reach this goal is a mistake. There are several reasons why you shouldn't sacrifice your retirement to fund your child's college education.

Don't jeopardize your retirement by using it to fund college CC BY:  Via Flickr
Don't jeopardize your retirement by using it to fund college CC BY: Via Flickr | Source

You Can't Fund Your Retirement with Grants, Scholarships, and Loans

Parents often forget to consider their own financial needs in retirement when they stop contributing to their 401k or withdraw money from their accounts to pay for college. When they retire, the money they need will no longer be there and unfortunately, funding retirement with loans, grants and scholarships isn't possible.

A child, on the other hand, can tap into the vast array of financial help available for students. If your child is athletic or smart, scholarships are available. Do a search on Fastweb.com and have your child apply for as many scholarships as they qualify for. Encourage your child to participate in sports and if they excel, provide the support they need to develop their skills.

Grants are also available for those with financial need. Filling out the FAFSA each year will ensure that your child gets the financial help they need. Don't be discouraged from filling it out because you think you're income is too high. Even households making over $100,000 per year qualify for aid.

Finally, don't rule out loans for college. If your child borrows smartly, this can be a great way to pay for part of college. The best loan deals are the Federal Perkins loan and the Subsidized Stafford loan. Each allows the student to borrow with a reasonable interest rate that doesn't start accruing until the student starts paying off the loan six months after college.

The next best loan is the Unsubsidized Stafford loan. Interest starts accruing while the student is still in college but the loan has flexible repayment terms since it's part of the Federal government's loan program.

The loans you should avoid are private bank loans. The repayment terms are inflexible and frankly, if you need to borrow more than what the Federal Government will give you ($5500 for Freshmen), you should consider a less expensive college.

It goes without saying that you can't borrow money for retirement. Having your child accumulate $20,000 in debt for college isn't a bad thing and may actually be a great lesson in money management.

Your Child Will Learn Money Management and Responsibility

Which brings me to my next point. If you insist that your child contributes to their education through employment and loans, you'll be providing your child with an invaluable lesson in money management. It's not unreasonable to assume that your child could earn $2000 or more in the summer to help pay for college and another $2000 during the school year.

Earning money and budgeting it is a great lesson for young people. Once they graduate and get their first job, having a loan payment will teach them financial responsibility. So don't feel bad if you can't fund your child's entire education. Feel great that you're helping them learn valuable skills!

You Won't Be a Burden to Your Child Later

If you raid your retirement funds or stop contributing to your retirement funds to pay for your child's education, you may fall short in retirement and become a burden to your child later. This is probably the last thing you want to happen. Paying for your child's education in full and then turning around and asking them for help later is counterproductive.

Instead, let them take some responsibility and continue funding your retirement while they're in college. Both you and your child will be happier in the long run.

Retirement Funds are Not Considered in Financial Aid Calculations

The last reason not to use retirement funds for your child's education is that retirement funds are not considered in financial aid calculations. If you've been faithfully putting money into an IRA or 401k for years, count yourself smart. The entire balance is considered off limits to the college or university as they calculate your assets available to pay. What this means is that you're better off maxing your your contribution and saving less for college. If you can do both, great! Just don't undermine your retirement contributions in order to save for college.

Other Options for Paying for College

If, after considering all of the alternatives to your retirement funds for paying for college, you find that you still have a funding gap, you may need to take more drastic measures. Consider having your child attend a local college or university while living at home instead of on campus. This saves a ton of money since room and board packages can add roughly $15,000 per year to the cost of college. I'm willing to bet that you could provide a room and food for your child for less than this. Also consider having your child attend Community College for the first two years while living at home. The cost will be a fraction of the cost of the typical four year institution. After that, they can transfer into a four year college and earn their degree there.

It's difficult to look at the college decision in an unemotional way but it's important to do so to avoid making big financial mistakes. With the cost of the typical four year college running about $200,000, the stakes are high. Avoid dismantling your retire plan to pay for it. There are other ways!

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Comments 4 comments

bankscottage profile image

bankscottage 4 years ago from Pennsylvania

Great advice. Retirement funds are never a good way to pay for your child's college education. But, lately I've become worried about using student loans (at least a lot of student loans). Too many students are graduating with far too much debt. Debt that would be difficult to pay off even if they got a full time job using their major.

I would like to think that some brilliant economist could come up with a debt-to-future income ratio. Based on current and future earnings for any given career, there should be a maximum debt level any student should incur for a degree in that major. This would allow for debt that could be paid with a portion of your income and still leave enough income for a reasonable lifestyle. Debt so high that the majority of your income goes to pay the loan would be identified and discouraged.

We should shop for college like we shop for a tv. Find a good price, with the features that we want and can use now and that will still be useful in the future. Paying for a major that won't result in a good paying job seems like a waste of money regardless of where the money comes from.

Getting the student involved in paying the costs is also a great idea. Start by letting them pay for books. They can decide if they need every book recommended, new or used, bookstore or on-line. I suspect they will want to spend as little of their money as possible. Housing can be another variable expense that they may find cheaper alternatives if it is their dollar.

Part-time work is not a bad idea while in college. My kids all did better academically when they worked than when they didn't. They had better time management.

Finally, it may not be popular but the military, GI bill or ROTC, can be great ways to fund a college education.

Voted up, useful, and shared.


SD Dickens profile image

SD Dickens 4 years ago Author

Hi Bankscottage - Thank you for the vote up and thoughtful comments. The military and GI bills are excellent recommendations for how to pay for college as well. I agree with you on shopping for college. It doesn't make sense to pay top dollar for a degree that won't pay out in the end. It's all about the return on your investment.


Funom Makama 3 profile image

Funom Makama 3 4 years ago from Europe

Even though I do not live in the USA, I still value, respect, appreciate and envy some of your systems which are quite flexible for you to use as you carry on with your Life endeavours and one of such is the student loan you partly emphasized in this wonderful hub. Your advice is lovely and I still think it is a great idea. Voted up and thanks for the wonderful share.


alphajuno profile image

alphajuno 4 years ago from League City, TX

This is great advice. It's tempting to use retirement funds now that the withdrawal is not subject to the 10% penalty any more. But, I think that the alternatives you suggest are much better options. Thanks.

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