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Don’t Pay Your Children’s College Education

You should not sacrifice your retirement, your savings, or your future financial stability in order for your children to attend college. They are fully capable of supporting themselves, just as generations have before them.

The average cost of a year at a private four-year college institution in 2007-2008 was $23,712. The cost of a year at a public four-year college institution was $6,185. Both were increases of over 6% from the prior year and don’t even include room and board! [CollegeBoard.com [3]]

Bottom line (a surprise to no one): College is expensive.

With the college costs soaring, parents are increasingly feeling the pressure to borrow money against their homes (if they can) or raiding nest eggs in order to help their children get the best education available. Children are our future, not some numbers on a statement, so it’s natural that parents feel that “parenting instinct” kick in when it comes to their needs. However, sacrificing your retirement or taking on more debt to help pay for your children’s education is a financial mistake.

It’s Not About Love, Sacrifice, Devotion

Before we get into the financial reasons you shouldn’t take on debt for your children, let me be clear that this has nothing to do with whether you love your kids, whether you’re willing to sacrifice more on their behalf, or whether you’re good parents. It’s strictly a financial thing. Michael Jackson has all the money in the world and he was dangling his kid off a balcony, that dude is a terrible parent. I have no doubt you love and care deeply for your children, otherwise you probably wouldn’t be interested in this article, but this involves thinking with your head and not with your heart.

They Have Time, You Don’t

Even though student loans may be increasingly difficult to get, they are still available and should be your first choice when it comes to taking on debt for education. Your children will have decades upon decades of working years that can pay off that debt, the same can’t be said for you. By putting the debt burden on their shoulders, you can enjoy a peaceful retirement while they can handle the responsibilities of managing that debt. (plus, they may be eligible for one of these education loan forgiveness programs [4])

Also, your retirement savings should be left for your retirement. This is a maxim that applies whether you’re considering buying a new house, a new car, or a new education for your children. Retirement assets are for retirement. Let your children take out Perkins’ and Stafford loans, let them take out private loans, let them take on the burden of debt to pay for their own education – your retirement shouldn’t even be in the discussion.

Student Loan Tax Deductions

When your child takes out a student loan and begins paying it back, they can get a student loan tax deduction for the interest payments [5]. If you pay for their education or take out a loan yourself, you may or may not be eligible for that tax deduction. Letting them take out the debt makes it that much more affordable. Of course, if you were to fund the education with a home equity loan, you would be able to deduct those interest payments but that’s less than optimal. Also, because it’s not a student loan, you lose the favorable interest rates that many student loans receive.

Improves Credit & Responsibility

Establishing a credit history and improving your score is always a struggle for a young professional. It’s the classic chicken vs. egg scenario where credit cards won’t approve you without a history and how you can’t build a history without debt. Student loan debt is a great way to establish and build a solid credit history. It’s a revolving debt and one that you’ll likely be paying for quite some time, so it gives you ample time to prove you’re a responsible creditor capable of making your payments on-time. It’s also usually a low interest loan, low relative to credit cards and other consumer debts, with a favorable tax deduction so you aren’t paying out the nose for this “feature.” While it’s always better to be debt free, if given a choice you’d always want student loan debt to be the one you’re carrying.

Those are three solid reasons why you shouldn’t raid the nest egg and let your children pay their own way. If you’re set on helping your children pay for college, consider opening an education investment fund like a 529 plan or a Coverdell ESA rather than pilfering the 401(k).