Retirement Accounts As A Last Resort
If the point hasn’t been driven home already, in most cases, and for most people, tapping your retirement savings should be a last resort, after having exhausted all alternatives. If you absolutely must use retirement savings for college expenses, here are some options, and considerations to keep in mind.
“You might be able to tap your 401k if your employer’s plan allows you to take a traditional early withdrawal,” says Assaf. “Note, however, that these early withdrawals have taxes, and penalties involved if you are under age 59 ½.”
If you’re exploring a 401k loan, be sure you’re able to pay the loan off on time, and in full, adds Assaf. You should also avoid borrowing more than is absolutely necessary, and continue making contributions toward your retirement even after pulling out the loan so that you don’t lose the benefit of time when trying to reach savings goals.
And finally, always bear this point in mind when considering your options, says Assaf: “While you can take a loan out for college, you can’t take one out for retirement.”
How Do Parents Pay For College If They Cant Afford It
Your child gets into college maybe even their top choice and you are thrilled. There’s just one problem: you don’t have enough saved up. You want to help pay for their education but can’t afford to. What options do you have?
Of course you can encourage your child to apply for scholarships and grants to help offset the cost of school. But what can you do if you still can’t afford college?
Strategies For Paying Your Children’s College Tuition
With education costs rising, finding ways to help our children pay for college is a priority for many of us.
A goal for many of us, is to see our children go to college. Although a worthy goal, its also one that takes focus, discipline, and smart saving to achieve. Lets explore options that could help pay for college.
As a reference point: for the 2017-2018 academic year, the average cost to send your child to California State University per year, living on campus and inclusive of all costs , is $28,086. The cost to attend the University of California is $34,700. With such costs, its hard not to feel overwhelmed.
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Use Your Retirement Savings
The options above are often the wisest choices, but you do have a couple other choices using retirement savings or home equity. While not ideal, this approach might be worth considering in some cases.
If you have some wiggle room with your retirement accounts and arent worried about your future finances, you could tap into your retirement account to help pay for college. This option is only available to parents under the age of 59½ with an IRA account. You will not face early withdrawal penalties but might have to pay taxes on the amount depending on whether you have a traditional or Roth IRA.
This option isnt available with a 401, but you might be able to get a 401 loan. Check with your retirement accounts for your options and what it would cost you to do this.
How to use your retirement to pay for college
Choosing this option when paying for college will depend on what retirement account you have set up and its limitations for early withdrawal. Its helpful to reach out to the institution managing your retirement account to find out exactly how to request a withdrawal to pay for your childs college education.
Your human resources advisor might also be able to guide you on the process if your account was set up by your employer.
Research Alternative Borrowing Methods
If you havent saved enough money in advance, and dont want your child to struggle with student loan debt, looking into alternative borrowing methods can make financial sense. One of the options you can consider is tapping your home equity.
If youre a homeowner with good standing on your mortgage, you might be eligible to take out a home equity line of credit, which you can use to fund your childs tuition costs and other college-related expenses. If youre a homeowner age 62 and older and have paid off your mortgage or have considerable equity in your home, you might consider taking out a reverse mortgage to bridge the gap in paying for tuition costs (learn more about how reverse mortgages work here: However, as with all types of debt, you need to understand the benefits and risks of tapping your home equity to finance your childs education.
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Traditional And Roth Iras
An IRA is a tax-advantaged savings account where you keep investments such as stocks, bonds, and mutual funds. You get to choose the investments in the account and can adjust the investments as your needs and goals change.
Under the SECURE Act, you can now wait until age 72 to begin taking required minimum distributions , and the law removed the age requirement for depositing money into a traditional IRA, so you can continue making contributions at any age if you are still working. In general, if you withdraw from your IRA before you are 59½ years old, you will owe a 10% additional tax on the early distribution.
However, you can withdraw money from your traditional or Roth IRA before reaching age 59½ without paying the 10% additional tax to pay for qualified higher education expenses for yourself, your spouse, or your children or grandchildren in the year the withdrawal is made. The waiver applies to the 10% penalty only you will still owe income tax on the distribution unless it’s a Roth IRA.
What Edition Of Turbotax Is Right For Me
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What Factors Does The Court Review When Determining Child Support For University Costs
The child’s financial dependence is a primary qualifying factor when determining whether support should extend beyond the childs 18th birthday. If a child is no longer under their parent’s roof and lives without financial assistance, a judge may decide that the child is emancipated and not order child support or make either parent pay for college expenses.
If the child is not emancipated, the court will usually look to whether university costs would be an unreasonable burden on either parent and if this financial contribution is in the child’s best interests. As such, when determining whether parents should pay for college expenses, a judge may consider the needs of the child, the financial circumstances of both parents, where the child currently resides, the childs educational ambitions, and how the university in question could help the child further those ambitions. The judge may also consider the types of economic aid the child may use to help fund their education and whether both parents contributed in the decisions surrounding where the child goes to college.
When a judge does issue a separate order for a parent to contribute to university expenses, the Court will usually not require either party to pay for more than half of the annual cost of UMass Amherst, which is used as a baseline for the cost of tuition. In general, there are many nuances and complexities to these situations.
Going The Grant Route
Grants look a lot like scholarships, but they tend to serve different purposes. You’re much more likely to receive a grant if you have demonstrated financial need, and those who have financial resources to help them pay for college will find it more difficult to meet the qualifications to get grants to help them with their educational expenses.
Grants often come either directly from schools or from federal or state government programs. In some cases, grants are targeted to students who fall into specified groups, such as low-income households and minorities, while others are more general in their application.
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Small Business Owners Hire Your Child To Pay For College Tuition
Last week we talked about implementing an Educational Assistance Program in your small business to help pay for your child’s college. If that tax-saving strategy wouldn’t work for your business situation, there is another strategy small business owners can use to build their kid’s college nest egg. However, this tax strategy will take some time to see real benefits, so if you have young ones – get to planning now!
Here’s the StrategyHire your child to do legitimate work in your business, pay them an annual amount equal to the standard deduction , then have them put their earnings into savings or an IRA. .
What is considered legitimate work?You could put your kid to work doing something as simple as filing or answering phones, office cleaning or landscaping. If you have a teenager who is into social media – what teenager isn’t – you can hire them to take care of your social media marketing & website updating.
The IRS has no official minimum age requirement for parent’s hiring their children so if you have a very young child, you could hire them as a “spokesperson” – basically pay your child a salary to use their image on marketing materials, etc.
Who does this benefit? My business, my child, or me?All of the above! Your business will benefit with payroll deductions and if you operate as a proprietorship or partnership you will not have to pay payroll taxes if your child is under 18.
Ways To Pay For College: College Savings
Ideally, parents should start saving for their childs education before theyre even born. Of course, life is rarely so ideal. Whether due to unforeseen circumstances or low income, sometimes families arent able to create a college savings plan or arent able to save up enough to pay fully out of pocket. And thats ok, most families cant pay the full cost of attendance on their own. If thats the case for you, dont panicthere are plenty of other ways to help your student pay for college.
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Have Your Student Work Part
If your child has enough flexibility in his schedule, working part-time can be a great way to start paying off college expenses while still enrolled. Even better: Some companies, such as Starbucks, UPS, and Verizon, offer tuition reimbursements for eligible employees, so choosing the right employer may garner even more money for college.
I’m Making Sure Our Family Is Financially Healthy
Being able to pay some or all of your child’s college education is a luxury.
Your kid doesn’t need to go to a four-year college at 18 to survive, and you don’t need to cover the bill. Besides, there’s no point in putting away college money if it forces you into debt or sets you up for a precarious financial future.
First and foremost, my family is committed to addressing our financial needs before shelling out for the wants. For most people, that means covering your basic expenses, paying down debt, and saving for retirement.
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Viewpoint : Parents Should Not Be Responsible To Pay For College
Most parents want their children to be safe, successful, and financially sound. But does that require them to foot the full bill for their childs college education especially when paying for college often includes taking out loans? That debt burden can be a financial nightmare for parents who are trying to manage their own expenses while saving for retirement.
In these cases, some experts believe parents should say no to paying for college. These experts say that taking responsibility for funding their own education helps young adults learn how to be smart consumers. For example, when faced with the reality of the price of college, students can learn how to think creatively in order to afford their education. Deciding to pursue part of their program at a less-expensive community college, working part-time while taking classes at night, or choosing a more practical major can help. Plus, while a student can borrow money for school, his or her parent cannot borrow money for retirement.
Still, while one can argue there are benefits to students funding their own education, it often seems colleges expect parents to foot the bill for a college degree.
Should parents be required by the government to pay for their childs education? Tippett says no.
First off, not every family could afford to pay, she explains. And, most importantly, not everyone needs to go to college or straight to college out of high school.
Are Parents Legally Obligated To Pay For College
State law rules that the obligation to financially support your kids ends when the child turns 18. That means parents have no legal obligation to pay for their childs college education with one exception. If the parents are divorced and the divorce agreement includes paying college costs, one or both parents are legally obligated to pay for college.
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Use Equity From Your Home
If you own your home, you may be able to tap into its equity to help your children pay for college. Note that this can be a risky proposition, so be sure to read the caveats below. That said, here are three potential ways to access cash out of your house.
- Use a home equity line of credit
- Take out a home equity loan
- Cash-out refinance
Home equity line of credit
A home equity line of credit uses your homes value as a revolving credit line. Usually you can take out approximately 80% to 90% of the equity in your home. You can borrow on an as needed basis during the withdrawal period. The repayment period is when youll have to pay back what you owe, plus interest.
Home equity loan
A home equity loan uses the equity in your house as collateral for the loan. Unlike HELOCs, home equity loan interest rates are fixed and you are given a set amount to pay back each month, like a regular mortgage. How much can you take out? Most lenders will allow approximately 80% to 85% of your homes appraised value, minus what you owe on your remaining mortgage, plus fees and closing costs.
Cash-out refinance
To pull cash out of your mortgage, you will need to refinance it for a larger one. Any amount over the mortgage needed to cover your house can be taken out as cash. Then, you are responsible for paying off the new mortgage.
The risks of using home equity or retirement funds
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- Apply for scholarships.
- Get grants from the college or from government entities.
- Claim the American Opportunity Tax Credit.
- Enroll in a work-study program.
- Find an employer that will subsidize tuition.
- We’ll look at each of these in more detail below.
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Question : Is Your Child Ready
Before you start shopping for colleges with your teen, think about whether theyre ready for it both academically and emotionally. Many students find the work at college is too challenging, and the distractions of student life are too great. A report from the National Student Clearinghouse Research Center found that only a little more than half the students who started college in 2009 had earned a bachelors degree by 2015. Before you invest money in tuition, its worth considering whether your child has what it takes to see college through to graduation.
For some teens, it might make sense to spend a year working before they start college. This lets them contribute financially and also teaches them to be more responsible with money. Learning the value of a dollar can also make them more willing to consider a reasonably priced school when the year is up.
Another option is for teens to start out by taking classes at a community college. This cuts the cost and gives your kids more time to mature. After two years, they can transfer to a four-year school to finish their degree. And if they decide after a year or two that college isnt for them, at least theyll have learned that lesson fairly cheaply.
Plan With Your Ex To Support And Pay For College
Should your child attend public or private college? Vollweiler observes that divorced parents may have differing expectations for their childs education.
One of you might want your child to attend the lowest-cost college, while the other wants them to attend the school with the top-ranked program.
Talk with each other and with your child about how much money youve saved for college, Vollweiler advises. How much additional money can be reasonably contributed?
What are each of your goals for your child? And what are your childs college goals?
Michele Larson, Founder of Knowledge 4 College suggests parents check each schools Net Price Calculator to get a reasonable estimate of the expected financial aid from that school.
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