Should I borrow from my retirement funds to pay for my child’s college education?

Nandita Das Financial Planning

We all want what is best for our children. That is an instinct that we also share with beings of lower form. We could classify that not just as love for our children but our instinct to live our lives through the success of our children.

If we think carefully and use a simple ’bucket strategy’ for the different financial and non-financial goals that we have, we should be able to pour from one bucket to another, albeit carefully. Especially when you have worked hard to reach a stage in life and it feels like Deja-vu.

There is not a simple right or wrong answer to this loaded question since financial decisions are never made in vacuum. Despite all this, the pundits are going to say “It is a bad idea to borrow from your retirement funds to pay for your child’s education” and they are right to a greater extent. But what exactly do we mean by “borrowing from my retirement funds”.

Are we talking about literally borrowing from 401K/403B?

Yes, you can borrow from your retirement plans under ’hardship withdrawal’ criteria for post-secondary education. Tread carefully! Retirement plans are not required to offer hardship withdrawal. Moreover, when you borrow from your retirement plan, typically plans will not allow you to make contribution to the retirement plan for six months after taking a ‘hardship withdrawal’. So it is a double whammy. You borrow and you cannot contribute. This might be still worth it, depending upon your scenario. It is best to analyze using a simple framework.

  1. What is your nest egg worth?
  2. Does your child not qualify for any other student-loan options?
  3. What are your expectations from this endeavor?

In general, do not borrow from your retirement account if you are relying on your child helping you pay off the loan later. In short, do not borrow with strings attached to the next generation. Borrowing from your retirement account might not be a bad option if you are thinking of merely suspending your contribution to the retirement plan for a short period to help with your child’s education funding,

Remember you need to understand what your goal is. It is YOUR GOAL but the experts can help you take the right step to reach your goals considering your options while respecting your values.