Confronted with college costs, parents reach for their 401(k)s

As tuition and room and board fees continue to rise, college sticker shock has parents reaching for increasingly drastic measures to pay for their children's school, a survey found. Financial advisors say those decisions could have long-lasting consequences on retirement readiness.

In a recent Citizens Bank survey of more than 1,000 U.S. parents, some 59% said they were confident in their ability to pay for their child's college education after they were accepted. But that confidence quickly eroded when the first tuition bill arrived, with just 21% of parents saying they felt prepared to handle the expenses.

Rising costs are widening that "confidence gap" as parents confront higher-than-expected expenses, researchers said. In just over a decade, annual college attendance costs have increased by more than 30%, up to an average of $41,000 across public and private schools. 

With typical 529 savings plans falling short of covering all of the costs, a majority of parents (62%) said they are expecting a delay in their retirement as they redirect funds to their child's education.

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Nearly a third of parents surveyed said they borrowed against their 401(k) or liquidated personal funds to help cover college expenses. And just over a quarter reported pausing their investing entirely while their child attended college in order to direct more money toward school fees.

Advising around a 'crazy notion'

Financial advisors like Michael Gerhard Hausknost, CFP and network member at GLG in Long Beach, California, say the insistence on paying for a child's college is "crazy."

"This has been my No. 1 pet peeve about the American investor/parent," Hausknost said. "This crazy notion that above all they have to pay for their children's higher education, retirement be damned. I've had more arguments with clients about that topic than I care to remember."

Not all advisors are as impassioned as Hausknost, but they largely agree on the same point: Unlike college, you can't finance your retirement.

Sarah Avila, a financial advisor at VLP Financial Advisors in Vienna, Virginia, said she usually advises her clients to have their children take out student loans in cases where the parents don't have enough money to cover the costs.

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"We remind clients that they will not be able to take out a loan to fund their retirement," Avila said. "The parent can help the child pay off the student's loans later if they can afford to do so without jeopardizing their own retirement."

Parents eager to help pay for their kids' college often resort to pausing their own retirement contributions without understanding the long-term implications, advisors say.

"They quietly reduce 401(k) or IRA contributions during their child's college years, intending it to be temporary," said Christopher Haigh, founder of Iconoclastic Capital Management in Rochester, New York. "But those pauses often last longer than expected, and the missed compounding is rarely recovered."

"When a client tells me they are thinking about stopping retirement contributions or borrowing against their 401(k) to help with tuition, I bring them back to the bigger picture," Haigh added. "We use modeling to show the ripple effect over 10 to 20 years. Often, the client is shocked at how much impact even a two-year pause can have on their retirement date or total nest egg."

Finding a better way forward

Parents eager to help their children pay for school often have more options available to them than they know, advisors say.

Long before tapping into their own retirement, parents can help their children look for grants and scholarships to help lower the cost of attendance. For remaining costs, advisors generally recommend taking out federal student loans, with repayment split between the child and the parents.

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Advisors say having some skin in the game makes children take their college education more seriously.

"I've seen firsthand how important this is. When I enrolled at a private university, my parents walked me through the financial implications," said Luke Harder, a financial advisor at Claro Advisors in Boston. "We decided I would take out a Parent PLUS loan, and we'd split the difference. Knowing what my payments would look like after graduation made the cost real — and motivated me to be intentional with my education, career prep and job search. College is a big commitment. Kids need to understand the stakes before they step foot on campus."

Reflecting on the parents' role

Advisors say the college conversation with parents is often about more than the financials. For many clients, paying for their children's education is an essential part of being a good parent.

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But advisors like Haigh say that's not necessarily the case.

"Being a good parent does not mean solving every financial hurdle for your child," he said. "It means modeling strong financial behavior and ensuring that you remain self-sufficient. That is a gift too. You do not have to choose between being a responsible adult and a loving parent. The two should work in harmony, not conflict."