Using Retirement Funds for Your Kids' Education
Parents, read this carefully. According to a survey of 4,500 couples by Allianz, 39% of respondents stated that saving for their kids' education was their primary motivation for a long-term financial plan. Among single parents, 45% shared that outlook. And in a LendingTree survey of 1,000 parents with children under 18, 68% revealed they would consider withdrawing from their retirement savings to underwrite their children's education.
The retirement-first rule of thumb
Although they admire that parents are generous and self-sacrificing, experts agree that it is rarely sensible to dip into retirement money.
Remember that college is generally a four-year project, whereas retirement can involve 20 or 30 years of outlays. Many parents rationalize their behavior by expecting their offspring to provide for them in turn with financial support later. They forget that their children may by then be financing their own kids' college educations, leading to a vicious cycle. Furthermore, if parents' retirement savings fall short and children are obligated to shore up the gap, the offspring may shell out more in the end than for just college bills.
There are clear advantages to prioritizing retirement savings. For example, funds held in a retirement account are immune from financial aid calculations. But once money is withdrawn it becomes income and then stacks up against aid eligibility. Do the math. The rate of return on the 401(k) may be higher than the interest on a student loan. Most college websites include a price calculator.
The path to college is paved with good intentions
Normally, parents want to provide their family with everything required for building a successful future. Education is key. Parents, over the course of years, have become accustomed to putting their children first, even when it means delaying or sacrificing their own needs or gratification.
Those parents who have been through the struggle of paying off their own college debt and making ends meet may be most determined to help ease the burden they have experienced firsthand. According to a 2021 report by Student Loan Hero, a whopping 36% of parents who are squirreling money away for a child's education are still carrying some student debt themselves. Hence, four in 10 of that group want their child to avoid debt at any cost.
Beyond such protective instincts, it is not uncommon to suffer some guilt. Despite their best efforts, by the time college looms, some parents feel guilty they have not put enough in the college jar. It is ideal to start early, leaving room for compounding.
Striking a balance
There are more options available for college support than for retirement saving. You are unlikely to be able to crowdfund your retirement, for one! (However, you can ask friends and family to chip in for college instead of giving birthday or holiday gifts.)
Consider:
- Low-interest federal student loans.
- Private loans.
- Grants.
- Part-time student work.
- Scholarships.
- Less expensive institutions, such as community or public colleges.
There are also midway solutions. You need not necessarily sponsor the entire college program. You could pay for some elements, such as room and board, while the student covers tuition and books. You could also partially fund education, such as using a 529 plan, which allows after-tax contributions to grow tax-deferred and be withdrawn tax-free.
Exceptions may prove the rule. It may still be appropriate for a parent to fund educational expenses if they already have a substantial retirement account, and especially if the child is motivated with high GPA scores and defined career goals. If you plan to pay off your child's student debt yourself anyhow, it may make sense to prioritize it over retirement saving. But always put your employer-matching fund first, since it is free money.
Talk to your planning professional about finding the right balance between saving for college and retirement.
