Don’t plunder your retirement savings to pay for your children’s college expenses

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With list prices that can exceed $ 50,000 per year, college can be a huge financial drain for families who don’t plan and shop wisely.

Case in point: Nearly one in five people who take hardship out of their 401 (k) retirement plan do so to pay for tuition or other school expenses, according to the Transamerica Center for Retirement Studies.

Well-meaning parents want the best for their children. But pillaging their retirement today means they may not have enough to support themselves in retirement. Which means their children might need to step in and help eventually. Which is not the goal of a parent.

To avoid trouble and get the best deal on quality education, follow these rules:

  • Hands off retirement savings. Period. No withdrawal. And no 401 (k) loans either. The big risk is the opportunity cost. Withdraw a large amount of money, and it’s dollars that stop piling up for you.
  • Don’t slow down your retirement savings. For all of the reasons just explained, there is never a good time to slow down the contribution to your 401 (k) or IRA. It must remain a priority.
  • Don’t start looking at your home equity. For homeowners, there’s a good chance that the value of your home has gone down in recent times. A national home value index is up 18% in the 12 months to June. The national gain over five years is over 40%. That makes a Home Equity Line of Credit (HELOC) viable, doesn’t it? Be very careful. In the extreme case that you cannot pay off the line, you could lose your home.
  • Don’t borrow first. The federal PLUS loan program that parents can use to pay for college is not as good as the federal student loans your child is eligible for. (All students are eligible for federal loans, regardless of family income.) In addition, there are safeguards on how much an undergraduate student can borrow under the federal loan program.
  • Seriously consider whether a four-year degree is necessary for what your child wants. There are many strong careers that require a two-year associate’s degree, and earning one at a community college can be a financial gain for the whole family.
  • Look for schools that will offer an affordable net price. All schools are required to publish their net price, typical disbursements to attend. For four-year private schools, the average net price is 45% lower than the list price.
  • Browse a financial aid offer for deception. Some schools like to play fast and free by including parent PLUS loans as part of the aid program. If, after negotiating with the help desk, college seems unaffordable, decline and consider another college.

Fried writes for Rate.com, a provider of personal finance news and guides.


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