Financial Planning magazine reported “about half of parents would rather withdraw money from their retirement account, work more years or take on a second job than have their kids take out student loans, according to a T. Rowe Price survey”… There also appeared to be some misconceptions regarding 529 accounts.
“According to T. Rowe Price, contributions to a 529 account can be withdrawn anytime for any reason. However, 25% of parents cited lack of access as a reason for not saving in this type of account. Additionally, 15% mistakenly thought that saving in a 529 account meant that they wouldn’t be able to get financial aid.”
These are some shocking statistics for a couple of reasons. The cost of financing a college education today is so high that half of parents would rather blow up their retirement savings, than have their kids take on excessive debt. We have purposely used the term “blow up” due to the fact that withdrawals from a retirement account prior to age 59.5 will require twice the desired withdrawal to cover income taxes as well as the early withdrawal penalty. By means of example, trying to avoid $50,000 in loans could cost a retirement account $100,000. Research also tells us that basing your financial plan on the expectation that you will be able to work beyond the traditional retirement age is fraught with risk.
The other shocker is the unwillingness of parents to utilize one of the best tools available in the tax code for college saving, due to their ignorance of how 529 plans work. This illustrates one of the fallacies of trying to use the tax code to incentivise certain types of behavior. With the code becoming increasingly complex with each passing session of Congress, the public’s eyes tend to glaze over when one additional ornament is hung on the tax Christmas tree.
Parents need to draw the line in supporting their children’s college aspirations. As painful as it may sound, they cannot afford to trade their retirement security for a debt free college degree.