Tips to Help You Avoid Using Last-Resort Funds for Higher Education
Education is one of the most valuable investments you can make in your child’s future, yet finding ways to help your kids pay for college can be a challenge. After all, higher education price tags can be tough to swallow. Many well-meaning parents find it tempting to dip into their retirement funds to help, but that can quickly sabotage all the hard work that went into growing those assets. Below, we’ll discuss options that will allow you to both help your kids pay for college and protect your own retirement security, too.
The price of college has reached an all-time high. As of 2021-22, the average cost of tuition and fees to attend a private college is $38,185, with the most expensive topping out at a whopping $63,530. It’s no wonder that parents consider every option they can to support their kids’ college dreams.
If you’ve thought about withdrawing your retirement money to help pay for your child’s college, you’re not alone. A recent survey of more than 1,000 parents of children under 18 found that 68% would consider taking money out of their retirement to help pay for their kids’ education. The temptation might feel stronger because the IRS allows you to withdraw retirement funds for educational expenses without penalty but remember—exhausting your retirement savings can severely compromise your financial future. Luckily, it’s not your only option.
Begin With a Budget
We know, we know—you’ve probably heard this one before. But many people don’t think of a family budget as a way to save for college tuition. Here’s how a detailed weekly or monthly budget can help you be more successful at saving and keep you from dipping into your retirement funds.
- Take a look at your cash flow. Is there anywhere you can trim some expenses and save even a few hundred dollars to put toward your child’s education?
- Start small. It can feel overwhelming to have to save up thousands and thousands, but even small amounts can add up to make a difference.
- Begin early. The longer you have to budget and save, the more interest your money will gain over time.
Remember, budgeting isn’t a one-time endeavor. Review your family budget annually to ensure you’re making the most of your ability to channel extra cash flow into college savings.
Consider a 529 Plan
A savings account is good, but a 529 plan could be a better fit when saving for college costs. A 529 plan is a tax-advantage savings account explicitly designed to help pay for education, including K-12, apprenticeship programs, and post-secondary costs. The tax benefits include tax-free growth, and no taxes when you withdraw funds.
Perhaps one of the biggest additional benefits is that the money in a 529 plan doesn’t have an impact on your child’s financial aid eligibility. They can still qualify for loans, funding assistance programs, and federal aid, all of which can lessen the burden of tuition.
If it feels like a hardship to put away large amounts of money into a 529 plan, remember that starting early and contributing in small increments can make saving for college more manageable. For example, if parents contribute $150 a month for 15 years, the total investment will be $43,768, assuming a hypothetical conservative 6% rate of return.
There is one drawback to be aware of. The money in a 529 plan must be used for educational purposes. If there’s a chance college isn’t a sure thing, you may want to reconsider where you invest to have more flexibility. No matter which savings option you choose, this approach can help.
Take Advantage of Home Equity
Tapping into your home equity can be a savvy strategy to help pay for college, especially a cash-out refinance of your mortgage, assuming rates are low and closing costs are minimal. Home equity lines of credit often offered with fixed or variable interest rate options, are another good choice. You can access the money you need up to the set limit, and pay it back when you can (though don’t forget about interest accrued).
Look Into Financial Aid and Student Loans
There are many resources available if you’d like to research the ins and outs of financial aid and student loans. The financial aid office at your child’s school can help you discover what your options are. Depending on your family’s unique circumstances and your child’s interests, there are usually many types of assistance available that you can take advantage of.
If you’re left with a gap between how much you owe and how much you have, loans are another choice. But loaner beware—the type of loan you choose can make a big difference. Each comes with its pluses and minuses so make sure you research your options carefully.
A Final Look at the Last Resort
If you’ve exhausted all your options and still can’t figure out a way to pay for your child’s education, using your retirement savings may feel like a must. If you have to tap into that money, make sure you understand the full scope of your decision and look at the big picture of its impact.
Your employer’s 401(k) plan may allow you to take a traditional withdrawal early, but that often comes with taxes and penalties if you’re under 59 ½ years of age. Another option is a 401(k) loan, but make sure you only borrow what you need and pay off the loan on time.
It can feel impossible to have to choose between your future financial health and your child’s future education. Thankfully, there are many ways to pay for your kid’s college expenses without paying for it too dearly yourself.
If you’d like professional guidance on financing college, we can help! At Resolute, we provide a personal perspective on wealth to help you and your family achieve your goals. Contact us today to learn more about our comprehensive services.