Oct 05 2010

Parents tapping retirement accounts to pay college tuition

This article about retirement funds being tapped to pay for kids’ college tuition really surprised me. Apparently, a quarter of parents in this country are planning on using retirement funds to pay for their kids’ college tuitions.

This is bad on so many levels:

  • They’ll be hit with tax penalties, so the amount of cash available will be less.
  • It will hurt their kids’ potential to receive financial aid.
  • The amount of money available for the parents to use during retirement will be much less!

You’ve heard this many times: You can’t take out a loan to cover your expenses during retirement — but your child can take out a loan for college. Or they can work. Or start out at a community college. Or do a million other things to help pay for school.

Because really, these kids may not have the resources to provide for their parents during their retirement.

It’s time we stopped this nonsense.

Parents, save for your own retirement first. If you have money left over after covering your living expenses, debts, and roughly 15 percent (or more, depending on your needs) toward your own retirement, then yes, please invest money for your children.

Don’t struggle to put your kids through college if your own financial house is a mess. College is not worth that.

And you know what else we need to address? Entitled kids. Oh yes, I’m going there.

I am of the firm belief that if a student does not at least partially pay for their own education, then it won’t be as valued. They won’t work as hard on their coursework. They will be more likely to miss a class just because they don’t feel like going. They won’t seek ways to lower their expenses. Because why? There’s no incentive for them to work harder or save money.

Lastly, when are we going to speak out against the insane tuition increases that are consistently higher than inflation? Let’s pick on my alma mater, Indiana University (Bloomington).

The in-state tuition for undergraduates for the fall 2010 term is $4,062.

For fall 2007 (the term after I graduated), the rate was $3,500. If I had enrolled before the summer of 2003 (instead of the fall of 2003), I could have paid a locked-in $2,895 per term.

And that’s just tuition — never mind rising fees, housing expenses or books.

Taking a look at Indiana’s main community college, Ivy Tech, the rate per credit hour for this term is $104.55. So, a student taking 12 credit hours would pay $1,255 and 17 hours would pay $1,777. MUCH more doable.

Is this whole situation outrageous to you, too?

6 Responses to “Parents tapping retirement accounts to pay college tuition”

  1. YES! I work at IU and it’s insane. Tuition is really expensive, and that’s not even the half of it! The mandatory fees in the area of $500 per semester if you take at least 6 credit hours. I worked, paid, and took loans out for my education and I’m feeling often that it was wasted money. I took out nearly $30,000 in loans to pay for an IN STATE university.

    Granted I am sure that I could have gotten by without taking out quite that much in loans, I still think it would have been a large number. Despite saving, working for free room and board and always having at least one part-time job (sometimes THREE), I still could not cover the expenses. I came very close to dropping out at least two times not knowing if it was worth it in the end. Now that I’m making as much per year working at IU that I owe to Sallie Mae for my education, it really does not seem worth it.

    I do not doubt that saying I have a college degree means something. I do, however, doubt that it means I am making that much more than someone without a degree. My earning potential may be (and probably is) higher for the long haul, and college was a great experience, but with costs rising I wonder how logical it will be to send our children to college in hopes of higher earning potential.

  2. We are one of those parents that believe that kids should work for part of their college tuition. We don’t have the money to pay for all their eductation and we don’t want to go into our savings for retirement. I told them that should stay in-state unless they have a need to go to a certain school ex. marine biology in FL. There are alot of NJ schools that would be great for our kids. I also believe if they have a desire to learn a trade, the world always needs plumbers, carpenters, electricians…

  3. We had put aside $10,000 in 15 years of scrimping for our oldest to attend college. It became $500 in a very, very short time during the stock market blunders a few years ago. Luckily she won a tuition-free scholarship to a private college in IN but still had to pay for books, fees, dorm, food. This was around $10,000 a year. We paid the first year, she did work-study and loans for the other 2 years (yes, she graduated in 3 years). Her loans will come due around Christmas this year and she is currently working 2 jobs and socking away almost all her pay in anticipation of these bills coming due. Not the best life right now but she knows it is important to pay these off quickly before real life takes over (housing, car payments, future kids, etc). I am immensely proud of her. She has always been very frugal and cost-conscience and these skills alone will benefit her the rest of her life.
    I also agree with Ericka – we need more people trained in the trades too. They make very good money and are definately needed, now and in the future. Sometimes I think schools spend too much time shoving college at kids who have no desire to attend and are wasting their money there when they could be learning a trade and becoming a useful member of society.

  4. Ugh, that is really, really hard to see $10k turn into $500 :(

  5. Just to add to what you said, Kacie: Most community college systems have agreements with the public universities in their states about transferring credits. I know Ivy Tech does. My brother just started college in Nevada — he’s doing his first year (all the gen-eds) at a community college, where the entire year will cost the family about $1250. He will then transfer every single credit to University of Nevada at Las Vegas, which is in state for him and my mom.

  6. Jane — YES! It’s brilliant, and yet so many people don’t do it. Looking back, I wish I took at least summer courses at Ivy Tech instead of pricier IU. It’s all the same on my degree. Oh well.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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