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Cashing out to pay kids' college a bad plan, experts say

Published: Sunday, July 5 2015 2:17 a.m. MDT

Mignonne Jeppson hugs her new graduate, Jessika, 18. Jessika is putting herself through college at Dixie State College. (Family photo) Mignonne Jeppson hugs her new graduate, Jessika, 18. Jessika is putting herself through college at Dixie State College. (Family photo)

Taylor Bautista earned an international baccalaureate diploma from high school to help pay for college. She grew up knowing she'd have to find her own tools to get there and got grants and loans. But sometimes hard work and hope only get you partway to fulfilling a dream. She needed more help, so she recently posed with a picture of her new tool: The strikingly tall 17-year-old has a giant grin as she stands in a camouflage-patterned uniform and hat that says "U.S. Army."

The National Guard will help pay for Bautista's education, a native of Colorado Springs, at Western Colorado State University, where she'll study elementary education. "It is very important to me that I get my degree," she said.

Alexandra and Jessika Jeppson, sisters 20 and 18 respectively, figured out how to send themselves to college after their mom, Mignonne Jeppson, of Heber City, said they'd be responsible for most education expenses. Their plans rely heavily on scholarships.

Taylor Bautista enlisted in the National Guard to help pay her college costs as she works to become a kindergarten teacher. (Family photo) Taylor Bautista enlisted in the National Guard to help pay her college costs as she works to become a kindergarten teacher. (Family photo)

"I don't remember not thinking I would go to college and I've always known I would need to pay for it," said Jessika Jeppson, who has a full scholarship to Dixie State College. "No loans. I didn't want to go there. I heard of people still paying off student loans in their 30s and 40s."

Being financially savvy at a young age puts Jessika Jeppson ahead of many parents contemplating what a college education costs. Many of them would be better off doing what Mignonne Jeppson has done: Experts say it often makes more sense to tell the kids to plan on covering their own college expenses than it does paying for it, especially if it would mean raiding retirement funds or savings that will be needed as parents grow old. Experts say parents should not sacrifice the amount in a 401(k) that has survived the recession. Nor should they saddle themselves with extra years of work.

Not well-thought out

"The thing with planning for college is most parents are in a pickle," said Cathy Pareto, certified financial planner and founder of a firm that bears her name and manages millions of dollars. While parents should provide for their children, including helping plan their futures, some "jeopardize their own financial retirement to send kids to more expensive schools, medical schools later, etc. I'm concerned."

"I just think it is frightening and boggles the mind that parents are willing to forfeit their retirement security for their kids' college educations," said Pamela Yellen, author of "Bank on Yourself: The Life-Changing Secret to Growing and Protecting Your Financial Future," a New York Times best-seller. "It's scary. Even without having to pay for a college education, some are so far behind in retirement savings it is a surprise if they can retire at all with any kind of income."

The past 13 years have been brutal for retirement savings, with little growth, she said, and if you consider inflation, many people who have been saving are actually in the hole.

Pareto, of Miami, said she questions whether programs like Social Security will endure. "There are real threats to an individual's future security," Pareto said. Parents who tap retirement funds — and even some who don't — may end up working into their 70s. Some may never be able to retire.

OK, now what?

Pareto said parents could help college-bound children "in a context of what they can afford … while asking questions. What does it do for your life? Is your child going to support you when he's out of medical school?

College-bound kids have resources from loans to scholarships that are not there to bail out over-extended parents who have given away their retirement, she said. Still, it's hard to disappoint offspring.

An Ameriprise Financial Inc. survey of 1,006 baby boomers found that 93 percent provided at least some financial support to adult children, while only 24 percent of those boomers said they are saving for their own futures, down from 44 percent five years ago.

The college-prep site Schools.com features a 2011 survey by SimpliFi that found 58 percent of parents haven't set up a college fund for their children. It noted 62 percent expect their children to share the cost of education and 22 percent said they'd pay however long it takes their kids to graduate.

Yellen said college is important but some options are gentler on family finances, including less expensive but respected state colleges. And children can pay for their own education. A free ride from the Bank of Mom and Dad "doesn't help build that sense of self-reliance: 'I can make it.' "

Parents who want to or can afford it need not take on the entire burden. "You can be there for your kids, co-sign on loans, but the kids have to be part of the financial discussion. Get them involved as you look at the impact of their decisions and your decisions. Parents can help scout out loans, scholarships, work study or employment on campus," Yellen said.

Pareto said parents should be transparent about family finances and "run the numbers." If you take a loan from your retirement to help fund college, must you work five years longer or cut back on expenses? Can you live with the ramifications? "By and large, there are solutions for young people whose parents can't afford it. I found a way to get loans. They will, too.

"I come from the school of thought that says even if I have everything to give to you, I don't think I want to give you everything. There is growth in a little bit of a struggle, in having to work for it and earn it," Pareto said. "The value that process instills on a child is priceless."

Self-reliance

Mignonne Jeppson said her children have always helped by sharing costs like clothing. She wants them to be responsible and money smart. And a degree alone is not enough to ensure a healthy financial future. "I told the girls, if you get a four-year education from a university, make sure you have a plan at the end of that goal and that it works for you."

U.S. News and World Reports recently explained "costly mistakes" parents make when it comes to college funding for kids, including not saving enough, early enough and taking out 401(k) loans to pay for schooling.

Pareto suggested letting people know you have a 529 account to help pay for college when kids are very young. Friends and family would probably be as happy to put $25 into a college fund as into buying toys. She recommends paying for college that way because of tax-free growth.

Yellen, who lives in Santa Fe, N.M., likes using a specific type of life insurance, against which money can be borrowed without depleting the policy's value or growth. She explains more at her Bankonyourself.com blog.

EMAIL: lois@desnews.com, Twitter: Loisco

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