I've heard this question many times - "Should I withdraw from my retirement to send my child to college?". It's understandable to want to pay for college for your child, and even more understandable that you don't want them to sign up for a "debt sentence". Even so, my answer, which is no, rarely varies and I will tell you why.
1. There are penalties to withdrawing from your retirement.
The first reason is based on financial consequences. When withdrawing early from a 401k, parents pay a 10% penalty as well as income taxes on the withdrawal. Also, this is considered income the following year and can reduce the student's financial aid package. Some employers may also prohibit new contributions for 6 months or more after withdrawal. These must be considered when weighing the pros and cons because many times, they will consume most of the financial benefit. Talk to a financial advisor before you make any decisions. You'll be lucky to save pennies on the dollar.
2. Handouts are always welcomed, but are they truly best for the student?
Many of my fellow students were largely footing the bill for college, or at least part of it. A few had everything paid for and handed to them. They knew that if they overspent, mom and dad would deposit some money into their bank account. Want to guess which ones worked harder?
According to "More Is More or More is Less? Parent Financial Investments During College," a paper by Laura Hamilton, a sociology professor at University of California, Merced, larger contributions from parents are linked to lower grades among students at a variety of four-year colleges. Hamilton states that "students with parental funding often perform well enough to stay in school but dial down their academic efforts." If you still want to pay for everything (and can without penalizing yourself), one suggestion is to correlate the funding with their efforts.
3. There are alternatives to paying for college, like scholarships.
There are scholarships and awards out there for nearly all students. Whether rich or poor, top of the class or not, athletic or not athletic at all (like me), there are scholarships out there. Students should be motivated to apply for scholarships before any withdrawal is considered. With the right resources, students can learn the process of applying for scholarships so that it is faster and more effective. Learn how to secure scholarships in 6 easy steps by joining my free online workshop: http://www.thescholarshipsystem.com/free-webinarhf.
4. Not everything has to be paid for from the beginning.
Some students borrow money or parents withdraw money that cover 'lifestyle expenses'. I like to call these 'lifestyle loans'. Some of the expenses, while legitimate, can be reduced as well as paid for throughout the year. These include housing, groceries, eating out, gas, parking, going out, etc. The question to ask is "Can my student work throughout the year and pay for some of these?" Perhaps a part-time job will cover rent each month or groceries and gas. They can also get seasonable jobs over holidays and breaks that can help pay for these. This will help reduce the amount needed, and hopefully the amount you feel you need to withdraw from retirement.
While these are my general rules of thumb for funding college, there are always exceptions. Nonetheless, hopefully these guidelines help in your decisions on how to fund college for your student. And if you want to learn the 6 steps that can lead to a free ride, join us for our free webinar on scholarships and other college funding at http://www.thescholarshipsystem.com/free-webinarhf.
Jocelyn is a best-selling author, public speaker, and founder of The Scholarship System, an online platform to help students and families fund college with scholarships and other free money. For more tips on scholarships and funding, visit www.thescholarshipsystem.com. To join her free webinar that was mentioned, go to http://www.thescholarshipsystem.com/free-webinarhf.