If you’ve ever flown anywhere, you’re familiar with the pre-flight ritual where a cheery flight attendant explains how to use a seat belt and where the exits are located. They also explain that in the event of an emergency, you should put the oxygen mask on yourself first before helping your children or others.
With that in mind, let me ask you a question:
Would you take money from your 401(k) to pay for your child’s college education?
This was one of the questions raised in a recent survey of parents of children age 15 and younger*. The surprising result was that over half of parents surveyed said they would take money from their retirement plan accounts to fund a child’s college goal. Given the taxes and penalties that must be paid on early withdrawal of retirement funds, and the cost to one’s own planning and saving for retirement, doesn’t it seem like taking money from your retirement to use for your child’s education is like putting the oxygen mask on your child first, increasing the risks to you both? it seems likely that there are better approaches to funding college costs.
The survey also showed that while over 90% of the parents surveyed felt that a college education was an important goal for their children, a majority were opposed to incurring debt to pay for that goal. Whether student loans or parental borrowing, the parents were not in favor of their children taking on that amount of debt and were almost as reluctant to do so themselves.
One common approach to saving for college, the Section 529 plan, was unknown to almost a third of the parents surveyed, while even more parents had the opinion that these plans were not an effective means of funding college, for various reasons. And with all the other varieties of tools and resources available to fund college – Coverdell education savings accounts, UTMA and UGMA accounts, Section 2503(c) trusts, scholarships and grants, federal aid, savings bonds and more – it is not surprising that parents really aren’t sure what is best for them to choose.
What might we take away from these survey results? It seems pretty clear that while parents want to ensure their children get a college education, they are not at all certain as how best to meet that goal and, worse, often would choose approaches that are not cost effective and might even undermine other important goals. Further, parents should take the time to better understand their and their children’s options as well as the impact of funding college on their overall finances both today and in the future.
If funding college goals for your children is important to you, you should discuss this with your Wealthcare advisor who will help you understand your choices and to pick the best approach to reaching that college goal.
Perhaps more importantly, your advisor will make sure the education planning works with your other financial goals, including retirement so that you will have rational confidence in attaining those goals and be certain that your plan will be updated to meet changing needs.
You don’t want to fund college for your children only to find yourself running out of “financial oxygen,” do you?
©2015 George Chamberlin