Question of the Day – Would You Borrow from Your 401(k) to Pay for Your Kid’s College?

September 15, 2010

Here is today’s Question of the Day:

Would you borrow from your 401(k) to pay for your kid’s college education?

I would ONLY do this if I had a lot of money in my 401(k). But, it would have to be A LOT OF MONEY! Seriously, I think this is a bad idea. Parents who do this are jeopardizing their future because they have a limited number of years to replace those borrowed funds. The kid, on the other hand, has a career in front of them . At the very least, parents could help pay for the loan after the student graduates from college.

So, my answer is: no way. I would not borrow from my 401(k) to pay for my kids’ college.

What about you?

11 responses to Question of the Day – Would You Borrow from Your 401(k) to Pay for Your Kid’s College?

  1. Don’t have kids but knowing that I made it through college without then there is no reason to get into my retirement savings for it.

  2. I agree, don’t borrow from the 401k. Stopping contributions? perhaps…

  3. No I don’t think so.

    While finishing college with a substantial amount of debt is definitely less than an optimum solution, young people have decades to overcome their debt while the parents have significantly less time to replenish their retirement funds.

    While this is water under the bridge for those who currently face this dilemma, the best solution, like packing away money for any goal, is to start saving on a regular basis from the time the child is first born, well before the funds are actually needed. Even if those amounts are only $25 per month, they will add up over time.

    And of course the student should have already begun a full court press into researching grants, scholarships and low cost loans.

  4. I say definitely not. My husband might be more open to it, until I convinced him otherwise, of course.

    An undesirable compromise might be to open a home equity line, b/c by that point we’d probably have 90% equity in the home. However, it would be a last resort. We have been contributing to the boys’ 529s for almost a decade, but w/the market returns lagging, the balances are not where I had planned. Thus…a full court press on scholarships, etc within 1-2 years for the oldest.

  5. No, I would not do that.

  6. I would not borrow from a 401(k) unless it had more money than I could ever spend in retirement, pretty much what JLP said. I think that you don’t need to pay top dollar to get a first rate education.

  7. I would not touch my 401-k for this under any circumstances. And I will continue to fully fund it every year too.

    If my kid gets into any school (whether low-cost state school or expensive Ivy League school), I will help her pay for it out of other funds. She will borrow the rest, either from me or through the usual student loan process.

    We’ve had her 529 plan almost since they were first introduced. Like Stacey’s, the returns suck. Unlike Stacey, my kid hits college next year.

  8. Who would do this? You can borrow money for education, but I’ve yet to see someone who can get a retirement loan.

  9. Hal,

    Believe it or not, people are doing this.

  10. Not us. We’ll help where we can without sacrificing retirement goals. The greatest gift you can give your children is not to be a burden on them in your old age.

  11. No.

    This is not theoretical for us right now, with an HS senior and a college junior in the family.

    We put aside money for both each year when they were growing up. DD is attending a $45K-per-year private college on school and ROTC scholarships. The school issued something of a private cc to the students, allowing them to purchase $4 lattes and put it on the school account without ever seeing actual cash stream through their fingers.

    Since she is 3K miles away, it’s hard to oversee from this point. It wasn’t until the end of her first semester that I got a look her account and was horrified to realize that she had spent a well-caffeinated semester, having racked up $300 on beverages and t-shirts.

    Just because they get into a good college doesn’t mean they’re smart.

    Two years later, maturity is slowly dawning, but there is no way she can understand at this time the sacrifices we made to save the money which, in her mind, was discretionary–the `fun-fund’. My retirement funds will probably be adequate–not generously so.

    With child #2, we are encouraging him to look hard at the very good state university 8 miles down the road. I am trying to persuade his father of the wisdom of requiring him to take out school loans each semester. If he does well, we pay off the loans. If not, that semester is on him.

    Some kids are eager to fly the nest, and others find sprouting pinfeathers to be an uncomfortable business, and need some nudging. Money motivates. My son left the house this a.m. at 6 to go cut firewood with a friend. They’ve both embraced the joys of unfettered capitalism while coming to understand something of the costs of doing business. My daughter, having burned through the savings we set aside, has been scraping paint for $10 an hour this week, and finding out why we encourage them both to get an education. Sore muscles and blisters speak louder than parental advice.

    Students also need to be realistic about which schools they can afford. There are fabulous non-ivy-league schools that welcome and generously support rounded scholar with high GPAs. I’d bet we all know people who took on loans they can never pay back because they didn’t sit down and do the math.

    ROTC is a terrific deal–my daughter’s tuition, room, board, books, and even travel have been covered, and her monthly stipend is currently $400. In return, she’ll work four years as a commissioned officer (this in a tough starter-job market)when she graduates, and has opportunities for more education and training in her chosen field.

    To sacrifice my retirement funds to shelter her from the reality of life is no kindness to her, and would foster resentment of every school-spirt t-shirt on my part. This way she knows that one t-shirt equals two hours of paint-scraping. I would not dream of depriving her of the opportunity to grow up and figure out just how much a $4 latte costs.