Paying for College with Retirement Money

So higher education costs keep going up even though most people have less money now than in past years. So how do people buy college now? While many parents and students are (thankfully) a little more skeptical about the wisdom of education loans, it looks like some families are making other risky financial decisions.

According to a piece by Emily Brandon in U.S. News & World Report:

Some 6 percent of parents withdrew money from a 401(k) or IRA to help cover college costs in 2010, up from 3 percent in 2009, according to a Sallie Mae and Gallup survey of 801 college students age 18 to 24 and 823 parents of college students. The average amount withdrawn from retirement accounts jumped from $5,318 in 2009 to $8,554 this year.

People can pay for education using Individual Retirement Account (IRA) funds without paying the customary 10 percent early withdrawal fee. People can withdraw money from 401(k) accounts if they can show “an immediate and heavy financial need for the money and show that other sources of income have been exhausted,” but they have to pay the 10 percent early withdrawal penalty.

Some families are also now paying for college using retirement account loans. This means taking a portion of a retirement account out to pay for college costs. This money still has to be paid back into the fund, however. “Some 3 percent of parents used retirement account loans to help pay for college this year, up from 1 percent in 2009,” according to the Brandon article.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer