A 401(k) is not a college savings plan


Here's the good news: Families are saving for college. In fact, according to a study released earlier this week by Gallup and Sallie Mae, 60% of families are socking money away. And they're doing a pretty good job of it. They start, on average, just after their child turns 3, and save about $3,000 a year. Gallup estimates these families will have about $48,000 by the time those toddlers matriculate, enough to fund about two years worth of education at the average four-year public college or university.

Here's the bad news: Much of the money that is being "saved for college" is being socked into 401(k) retirement accounts. To access it come college time, parents say they'll borrow or withdraw money from those plans, as a full 24% of parents are today. Neither are particularly good options. Borrowing from a 401(k) costs you future growth on that money as well as interest; plus if you lose your job you can be required to pay the money back inside 60 days or face income taxes and penalties. Withdrawing is worse. Taxes and a 10% pre-retirement penalty can cost you 30 to 40 cents on every dollar. Plus, because any money you withdraw is treated as income, you can lose financial-aid eligibility for the following year.


The Latest from our Partners