Why using your retirement savings to help your kids pay for college might not be a good idea

About two-thirds of high school seniors head off to college after graduation, paying an average of more than $38,000 per year for tuition and living expenses. By the time they finish their education, those same students have an average of $30,000 in debt. 

Many parents and caregivers would do a lot—including raiding their own retirement savings—to help their kids escape that debt burden. After all, retirement might be decades in the future. College costs? Those bills are right here, right now. 

Should you ever use retirement savings to pay for college for your loved ones? Here are some reasons why you may want to avoid it.

Many students take out loans—about one in four Americans between 18 and 29 has one. But loans aren’t the only way to pay for college. Students can also use financial aid or scholarships, if available, or consider the price differences between public and private schools. 

But you can’t take a loan (or apply for a scholarship) for your cost of living in retirement: Financial institutions won’t lend you money to pay for food, health care, and other living expenses.

About 17% of families withdraw from retirement savings to pay for college. Let’s say you’re one of them. You’ve decided to take out about two years of college expenses—approximately $76,000—from your retirement savings to help a loved one pay for college. Here’s how that withdrawal affects your retirement savings:

• You may have to pay early withdrawal penalties and taxes. If you’re younger than age 59½, the IRS will impose a 10% penalty on 401(k) withdrawals. 
• You’ll immediately reduce your retirement savings. The average retired household spends about $65,000 a year; your withdrawal to help pay for college translates to more than one year of potential retirement income you’ll have to replace. 
• You may lose out on future gains. Time in the market matters, and those savings won’t grow for your future retirement if you withdraw them now. 
• You may have to delay retirement to save more—something 60% of parents expect to do. 

When you factor in penalties, taxes, and lost growth, the true cost of withdrawing retirement savings can be much higher than the amount you take out.

Eighteen years ago, maybe you promised yourself you’d pay for every cent of your kid’s college expenses. But goals and budgets change, and it’s OK to adjust. That’s especially true if you’re considering withdrawing from retirement accounts to pay for college. By adjusting your college savings goals, you’re not failing; you’re actively planning your financial future. 

College costs don’t have to be an all-or-nothing approach. Conversations with your potentially college-bound kids can help, as can a shared approach to costs that help you preserve your retirement goals. Consider: 

• You pay for tuition and your student handles housing or personal expenses. 
• You contribute a set dollar amount each year. 
• You pay for with books or living expenses and loans cover tuition. 
• You support the first two years, then reassess with your child. 

Discussing college costs alongside your retirement savings goals can be a valuable learning opportunity for your young adults. Remember: They’re building their own financial literacy—and one day they’ll want to save for retirement and have multiple financial goals, too.