Most Parents Say They Might Use Retirement Savings to Pay for Kids’ College—Here’s What to Do Instead

As parents, it can be hard to resist helping your children as much as possible, including, or most especially, when it comes to paying for college.

For those among us who are struggling to set aside an adequate amount of money for retirement, however, it may be best to draw the line at raiding these accounts to foot the bill for higher education. Though not everyone seems to have gotten that memo.

A new survey from Student Loan Hero found that 68 percent of moms and dads would consider withdrawing from retirement savings to help pay for their child's college. Fathers were especially likely to opt for this approach, with 74 percent saying they would consider using retirement funds versus 64 percent of mothers.

These statistics shouldn't be completely surprising given the skyrocketing cost of college in the United States. The average tuition for the 2020-2021 school year was a staggering $41,411 at private colleges, according to an annual survey conducted by U.S. News. At public colleges meanwhile, tuition averages about $11,171 annually for state residents and $26,809 for out-of-state students.

Whether your child selects the private or public school route, there's likely to be a fairly hefty higher education price-tag in their future. Here are some alternatives to draining retirement accounts in order to pay that bill, as well as some tips from experts designed to help parents navigate the balance between a well-funded retirement and assisting children with college.

Before rolling your eyes at this ubiquitous tip from financial experts, keep reading just a bit further. Here's why a detailed monthly or weekly budget can ultimately help you be more successful at saving for college and help you avoid dipping into those retirement funds.

"Once you have a good understanding of your cash flow—all of the money coming in, and all of the money that's going out—for necessary and not-so-necessary expenses, perhaps you find that you have a bit of gap or a few hundred dollars extra that you could be putting toward your child's education," Andrew Pentis, a certified student loan counselor and education finance expert at Student Loan Hero, tells Parents. "Or some families may find they don't have that gap, and they need to look at ways to cut their expenses, or increase their income in order to have free cash available to dedicate, and redirect toward saving for a child's education."

For more than a few parents, the task of saving for college will seem overwhelming or simply too daunting, but Pentis says it's important to bear in mind that even small amounts that you can set aside month after month will ultimately add up and make a difference.

"If you have $25, or $50, every little bit helps, and is a victory," says Pentis. "It's doesn't have to be thousands of dollars, especially if your child is years away from college still. The total balance of your savings will allow your money to accrue more and more interest over time."

Yet another alternative to accessing your retirement savings is creating a 529 plan early in your child's life. These investment accounts have a lot of upsides as a savings vehicle, and a few drawbacks worth considering carefully.

For those not entirely familiar, 529 plans are accounts designed specifically to set aside money for education costs, and they offer tax benefits when the money in the account is used to cover qualified education expenses for a designated beneficiary. The tax benefits of 529 plans include the money being allowed to grow tax-free, and not being taxed upon withdrawal.

The cash in a 529 plan can be used to pay for college, K-12 tuition, apprenticeship programs, and student loan repayments. What's more, when using a 529 plan to pay for some or all of your child's college costs, the savings you've accumulated will have minimal impact on the child's financial aid eligibility. Meaning they can still qualify for loans, federal aid, or other such funding assistance programs.

Starting a 529 plan shortly after your child is born, or while they're still very young, is one of the most effective ways to make saving for college more manageable.

"Even modest contributions to a 529, with its tax-free growth, can help meet some of the costs of college," Paula Smith, senior vice president for retirement, college savings product strategy & development at Voya Investment Management, tells Parents. "For example, if parents save just $100 per month over 15 years, from the time their child is small, that could grow to just over $29,000—assuming a hypothetical modest rate of return of 6 percent.  What's more, roughly half of the $29,000 will be in the form of earnings on investments." 

However, it's important to remember that the money in a 529 plan must be used for qualifying educational expenses in order to maintain the tax benefits. This restriction may cause some families to consider other options.

"Many families prefer to have greater flexibility, so they opt for a mutual fund because you won't have to worry if your child has no desire to go to college once they reach 16 or 17 years old. That money is freed up in a mutual fund," says Pentis.

The bottom line? Take a look at all of the different types of savings and funding options and accounts available to you as a parent before making any final decisions. You may even want to write down the pros and cons of each option, as well as listing what you're looking for in a school savings account, says Pentis.

Those who have owned a home long enough to build up equity may want to consider tapping into this asset to pay college costs as yet another alternative to retirement accounts. Mark Conrad, a CPA, and CFP with Compardo, Wienstroer, Conrad & Janes (CWCJ), says a cash-out refinance of a mortgage can be a wise way to access home equity.

"Mortgage rates are near all-time lows, and most lenders are offering 30-year fixed rates at or below 3 percent, with minimal closing costs," Conrad tells Parents. "Another bonus of using this approach is that mortgage interest is deductible on your individual tax return."

Alternatively, home equity lines of credit (HELOC). typically provide reasonable interest rates, says Conrad.

"Most banks offer HELOC products with either fixed or variable interest rate options," Conrad explains. "Until the HELOC expires, you can access dollars up to your allowed limit, and pay the balance, plus interest, back at your convenience."

Take the time to speak with the financial aid office at your child's school to find out what financial support may be available, says Rita Assaf, vice president of retirement and college leadership at Fidelity Investments.  There are generally many types of scholarships and financial aid packages that can be applied for, depending upon your family's unique situation and background. Loans are yet another choice. But you'll want to be careful about the type of loan you choose.

"For parents considering loans to bridge any savings gaps, beware of Federal PLUS loans, which are a type of education loan that's taken in the parent's name instead of the child's name," Assaf tells Parents. "These loans often carry a higher interest rate than traditional student loans, and parents in our recent College Savings and Student Debt study indicated that this type of debt would impact their ability to save for retirement."

If the point hasn't been driven home already, in most cases, and for most people, tapping your retirement savings should be a last resort, after having exhausted all alternatives. If you absolutely must use retirement savings for college expenses, here are some options, and considerations to keep in mind. 

"You might be able to tap your 401k if your employer's plan allows you to take a traditional early withdrawal," says Assaf. "Note, however, that these early withdrawals have taxes, and penalties involved if you are under age 59 ½."

If you're exploring a 401k loan, be sure you're able to pay the loan off on time, and in full, adds Assaf. You should also avoid borrowing more than is absolutely necessary, and continue making contributions toward your retirement even after pulling out the loan so that you don't lose the benefit of time when trying to reach savings goals.

And finally, always bear this point in mind when considering your options, says Assaf: "While you can take a loan out for college, you can't take one out for retirement."