College Funding and Your Retirement
from daveramsey.com on 06 Aug 2013
Most parents are willing to stretch themselves financially to provide a college education for their children. While they probably consider this “stretch” to be temporary, many parents are making choices that will have an impact decades into their future.
Parents Plan to Raid Retirement to Pay for College
Sallie Mae, the leading financial service company specializing in education, recently released How America Saves for College 2013. According to the study, parents of college students pay 28% of their children’s college expenses from their own income and savings. That means any and all savings—including retirement funds—are up for grabs when it comes to paying for college.
While the study shows more parents are saving for their retirement than for their kids’ college, many admit they intend to use their retirement funds to pay college costs.
And, as their kids approach college age, parents become more open to the idea of using their nest eggs to pay for college. Less than half of parents with kids younger than 6 years old would consider using their retirement for college, while 74% of families with teens would pay for college with retirement funds.
What’s the Big Deal?
Withdrawing retirement funds to pay for college may get the tuition bill paid, but it will lead to financial consequences down the road:
- The withdrawal can count as taxable income, which can raise your tax bill and reduce your child’s eligibility for financial aid next year.
- Not only will you reduce the balance in your retirement fund, you’ll miss out on the long-term growth that money would have provided.
- If you are younger than 59 1/2 and borrow from your 401(k), you’ll have to pay back the loan with interest within five years—or immediately if you change employers or lose your job.
Do Your Kids a Favor
As tough as it may be to focus on your own retirement security rather than provide a paid-for college education for your kids, you’re actually doing your kids a favor.
If you deplete your retirement savings, or if you don’t save for retirement at all because you put all your money towards college, you could end up depending on your kids instead of supporting yourself during retirement.
You have tons of options to pay for college: scholarships, grants, part-time jobs, work study . . . anything but student loans! But when it comes to retirement, your savings is all you have to rely on. Choosing your retirement over your kids’ college doesn’t make you a bad parent; it makes you a responsible parent.
Make Wise Choices With Professional Advice
Once you’re investing 15% of your income for retirement, you can start saving for your kids’ college. Consult an investing professional to find out what your options are.
Work with an advisor who follows Dave’s investing principles and has the heart of a teacher. Find an investing pro Dave recommends in your area.