Using Retirement Money To Pay For College May Be A Huge Mistake

Published: March 22, 2017, 3:05 p.m.

b"With\\xa0Sharon Epperson, Senior Personal Finance Correspondent, CNBC
Dilemma: Paying For Kids College
Parents have long faced the financial challenge of competing claims between their children's college education and their own retirement savings. What's new is that in the past decade or two the costs of college have inflated at near exponential levels. The consequences of this inflation are at least twofold: students are taking on massive debt on the one hand, and parent\\u2019s retirement savings are being depleted on the other. Sharon Epperson, Senior Personal Finance Correspondent at CNBC, joins Steve to talk about this dilemma, trying to find a balance between parent\\u2019s and children's contributions to the cost of college, strategies for retirement saving, and reigning in household expenses.
Using Retirement Money To Pay For College: Don't Do It
While many parents pull money out of their 401k, IRA, or other retirement savings account to reduce the burden of college loans on their children, Sharon is emphatic that this is a boundary that should not be crossed. While the instinct to shelter your kids from what might be very heavy debt (the average is now $29,000) is natural, it should never be done at the expense of your own retirement funds, which cannot be easily replenished. There is no such thing as a \\u201cretirement loan.\\u201d\\xa0 Steve comments that he often advises parents dealing with this issue that their children generally have a much longer timeline to pay back their college loans than the parents do to refill their retirement fund coffers.
Lessons From The Struggle To Pay For College
Sharon concurs, noting that parents don't have as long to recover from a financial setback as children do and, therefore, need ample savings.\\xa0 She also believes that there are some potentially very valuable lessons that parents can take from this situation and impart to their children. It's important for parents to stress to their children that they too had to work and save to help pay for their own education (albeit far less in dollar terms), work extra hard for scholarship money, and perhaps even take on loans as well. One takeaway is that sacrifice is often required for achieving your most important goals, another that with the right attitude and understanding, loans can be a valuable tool, not just for what they can buy but for the self-discipline they require to pay down. The realization that they are about to leave the nest and that Mom & Dad won't be paying for everything can ultimately be empowering, especially when contrasted against students who are sheltered from that realization
The Four-legged Stool Of Paying For College
Steve proposes a four-legged stool metaphor to explain how college can be funded: one leg would be student loans, another leg contributions from parents (whether from income they don't need or a college fund they've been investing in), and, as a third leg, the savings that the student has squirreled away from their own jobs. Sharon chimes in with the fourth leg: \\u201cfree money\\u201d meaning essentially scholarship funds, a kind of holy grail in the college financing game. As difficult to believe as it may seem, the hunt for scholarships can begin at a young age while parents are supporting a variety of extracurricular activities. If a child excels in one or more areas, these could become building blocks later on that could eventually support a scholarship application. She notes that parents can start learning about specific scholarships and the criteria they're based on through the website fastweb.com. They may also be able to research scholarships sponsored by various organizations, perhaps a trade union you belong to, or local businesses, etc. Sharon argues that high school or even junior high is not too early to start crafting a resume for your children."