Bad Trade: College for Retirement

“Sometimes self-interested is the most generous thing you can be.” - Tony Kushner This quote came to mind after fielding a question about using retirement funds to pay for tuition. For most people, tapping retirement accounts or funding college education before retirement, is a bad trade. These parents, who want to help their kids, could be jeopardizing their own futures with these decisions.

Before thinking about putting money toward your kid’s education, you need to make sure that you have covered “The Big Three”: (1) Paying down consumer debt (2) Establishing an emergency reserve fund (3) Funding retirement. If any one of these items is outstanding, you need to put education funding on the back burner.

Before you say, “But I have to make sure my kid gets a college education and I don’t want him/her to be burdened by student loans,” let me remind you that there is no reason that you can’t help your children both earn a degree and do so without mounds of debt. To do so, you need to be more careful about how you choose which school to attend. Perhaps a community college, combined with a state school or attending the school that will provide the most money or best financial aid package, but the idea of raiding your retirement account to allow your child to attend ANY school she wants, should not be an option.

The problem is that many parents are reluctant to have difficult conversations with their children early enough to prepare the kids to make different choices. According to T. Rowe Price's 2016 Parents, Kids & Money Survey, 62 percent of kids 8 to 14 years old expect their parents to cover the cost of “whatever college I want to go to.” A near equal percentage of parents (65 percent) will only be able to contribute some to the cost of college. There is clearly a disconnect between expectations and reality here.

You can’t really blame the kids, if the parents are not raising the issue. One main reason parents are reluctant to do so is that they feel bad about not being able to give their kids what they want. The survey found that 63 percent of parents agreed with the statement “I feel guilty that I won't be able to pay more for their college” and a 42 percent said they are losing sleep worrying about college costs.

These deep emotions are luring parents into dangerous territory. In addition to pulling money from retirement accounts or shortchanging plan contributions, they are going to hock. The survey found that more than half of parents (57 percent) are willing to take on $25,000 or more in debt to pay for their kids’ college education, with 19 percent willing to borrow $100,000 or more.

How are these people ever going to retire, if they are servicing these huge debt loads? 76 percent of them say that they will delay their retirement and 68 percent said that they would be willing to get a second or part-time job to pay for college education. Sounds like a great plan, except that how can they ensure that they will be able to hold on to their job or find another to fund the gap?

I worry that in an effort to provide the golden opportunity of college, many parents are actually creating a future burden for their kids. After all, if you are struggling to meet your retirement needs, your children will likely be on the hook for you. That’s why “Sometimes self-interested is the most generous thing you can be.”