Families saving for college: A mutual approach

This article will ... Describe the ways that a permanent life insurance policy can potentially help you pay for your child’s college tuition. Explain why tapping your retirement accounts to pay for your kid’s education can seriously compromise your financial stability. Highlight some of the ways parents can help their kids get a college education, without providing financial support.

For most families, paying for college is a major commitment that involves piecing together a combination of savings tools, including 529 plans, taxable investments, financial aid and, in some cases, even permanent life insurance.

Indeed, many families use multiple methods to fund their child’s college. Many, too, place high hopes on scholarships and expect their child to contribute through part-time jobs or loans.

That includes parents like Danijel Velicki, a senior partner and founder of Opus Wealth Strategies of Virginia in Virginia Beach, Virginia, who can afford to cover tuition costs in full. Why? They want their kids to have some skin in the game.

“We are saving for my kids’ tuition, but we’re also going to make them get scholarships, grants, and loans,” said Velicki, noting he observed too many peers during his college days who got a free ride from mom and dad and took it for granted. “Half of them didn’t graduate, or even go to class.”

For his own kids, Velicki said he will require them to take on student loans, and he will help pay for those loans only if they graduate. “If they don’t graduate, that debt is on them,” he said. (Related: What high school seniors should know about student loans)

Such strategy serves another purpose as well: It gives him four more years to invest in taxable savings accounts, and potentially build cash value in his life insurance policy, both of which he intends to use to help his kids pay off their final student loan bills. (Money in his 529 account will be used to immediately offset some of the college cost, since 529 funds generally must be used to pay qualified higher education costs in the same calendar year the expense was incurred.)

“If I have $100,000 saved when they start college, I could have $125,000 by the time they graduate 5 years later just because of the growth of my principal in my brokerage account,” said Velicki.¹ “The growth alone could potentially pay for half or more of their tuition, rather than spending it all on day one and losing that opportunity.” ⁵ (Learn more: 529 Strategies)

Because permanent life insurance enables policy owners to access their cash value for financial needs during their lifetime, including tuition, Velicki said such policies are a potentially good way for college savers to diversify how college costs are funded.

“I started to appreciate cash value life insurance during the recession in 2008 when cash value worked when nothing else did,” he said.

Take note, however, that life insurance is primarily intended to provide a death benefit, and while some permanent policies may allow access to cash value through borrowing or partial surrenders, doing so will reduce the policy’s cash value and increase the chance the policy will lapse. If this happens, it may result in a tax liability.

Rob your retirement?

Regardless of which college funding strategy you use, however, it should not come at the expense of your own financial well-being.

Financial professionals generally agree that tapping your tax-deferred 401(k) account or IRA, in all but the most dire of circumstances, can seriously compromise your long-term financial stability — which does no one in your family any favors.

“Your kids can always take student loans or apply for a scholarship for college, but you can’t borrow money for your own retirement,” said Velicki. “People forget about the value of compounded growth, which only happens with time. You can save more for your retirement as you age, or potentially increase your rate of return, but you can never create more time.”

Velicki adds that the greatest gift parents can give their kids is to provide for their own retirement needs first, thus ensuring they don’t become a financial burden later on.

Yet, a surprising number of families still prioritize their kid’s college education over retirement savings.

Roughly 17 percent of American families surveyed by Sallie Mae used retirement savings to help pay for their children’s college education in 2025.¹.

Early withdrawal rules

While financial professionals advise against it in most cases, there are ways to tap your retirement accounts for college if you have no other options As a general rule, the IRS allows taxpayers to take early distributions from their IRA to help pay for college without incurring an additional tax for making an early withdrawal. Taxpayers may still owe income tax on part of the amount distributed, but the 10 percent additional tax that would normally be assessed for those who withdraw money under age 59-1/2 would generally be waived if used for qualified higher education expenses incurred by the IRA owner, their spouse, their child, or their grandchild.²

Early withdrawals from a 401(k), 403(a), or 403(b), on the other hand, are subject to income tax, plus the additional 10 percent tax, with no exception for higher education expenses.

That could make tapping a retirement account for college too expensive. Parents looking to use retirement funds for college, however, can potentially avoid the tax hit (at least until they reach retirement age) by taking a 401(k), 403(a), or 403(b) loan instead, if their plan allows.

The IRS indicates the maximum amount the plan can permit is 50 percent of your vested account balance or $50,000, whichever is less.³

Such loans must be repaid within 5 years, with interest (that goes back to your account). Take note, too, that any outstanding retirement plan loans must generally be repaid in full if the employee leaves or loses their job. Failure to do so normally results in a 10 percent early withdrawal additional tax on the amount not repaid, on top of the federal and state income tax they will owe.

Here again, however, just remember that a 401(k) loan can seriously undermine your ability to make ends meet during retirement. (Calculator: How much do I need for retirement?)

Not only will you forgo the opportunity for compounded growth on those dollars during the years your loan is outstanding, but your plan may also not permit you to make new contributions until the loan is repaid. If you are not making any pretax contributions, your income taxes may rise during those years as well.

Using the 401(k) loan calculator on personal finance website Bankrate.com, a $20,000 loan from your 401(k), assuming a 5 percent interest rate and 7 percent rate of return on your 401(k) investments, would cost you $7,841 over the course of 5 years — if the loan is repaid on time. Failure to repay in 5 years, which would result in a tax bill and a 10 percent penalty, brings the loss to more than $288,000 due to unrealized earnings, for someone with a 35-year time horizon until retirement.¹

 

You can still help

Remember, if you aren’t positioned to give your college-bound kids a free ride, it’s OK. There’s still much you can do to help.

Parents can research ways to cut the cost of a degree down to size, helping their kids minimize the debt they incur. (Learn more: Six ways to cut college costs in half )

They can expose their kids to different career options and create opportunities to speak with or even shadow professionals in the fields in which they have expressed an interest. They can help their kids research schools that might be a financial and academic fit, and they can help them fill out the application for federal financial aid to ensure they get the best package possible. (Related: Tips for choosing the best ‘financial fit’ college)

Many families fail to fill out the Free Application for Federal Student Aid (FAFSA), mistakenly believing they make too much money to qualify for assistance. (Learn more: How to read your FAFSA submission survey)

Arming your kids with a sense of direction is highly underrated, said Kathryn Hauer, a financial professional and author of “Financial Advice for Blue Collar America.”

“A four-year college is a great choice for many, but I’m an adjunct professor and I see an awful lot of students in college without a real plan for the degree or the job they eventually want,” she said.

Many rudderless students end up quitting after two or three years, saddling themselves with huge loans they still have to pay back but without the future earnings potential to do so. “The financial consequences of being undecided can be really crippling,” said Hauer.

All parents want what’s best for their kids, and for many that includes a college education. But the tuition assistance you provide should never compromise your own financial security.

“It’s simple math,” said Velicki. “If you save for retirement, plus a little extra for college, you can help your kids pay off their loans to the extent you are able and that’s not going to impact your life. But if you stop saving for retirement and put $500 a month into a college fund, that’s going to be a huge opportunity cost to your future.”

Since 1851, MassMutual has been focused on helping people secure their financial future and protect the ones they love. That mission is why we have over 7,500 financial professionals to assist you on your journey through insurance, investing, retirement planning, estate management, and more. You can find a MassMutual professional with this tool or you can let us know you’d like to talk to one and we’ll have one of our financial professionals can contact you.

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Frequently Asked Questions About paying for college

Q: How much does college cost for the 2025-2026 school year?

A: For the 2025-2026 academic year, the average total cost of attendance — including tuition, fees, room, and board — is approximately $26,000 for in-state public colleges, $46,000 for out-of-state public colleges, and $61,000 for private nonprofit colleges.⁴

Q: Should I use my retirement savings to pay for my child's college?

A: Financial professionals generally advise against tapping into your 401(k) or IRA to pay for college. While some families do use retirement account loans to fund education, doing so can severely compromise your long-term financial stability and opportunity for compound growth. Remember: students can borrow for college, but you cannot borrow for retirement.

Q: Does earning a higher income disqualify my family from financial aid?

A: No. Many families earning over $100,000 still qualify for federal aid. It is highly recommended that all families complete the Free Application for Federal Student Aid (FAFSA) to avoid missing out on scholarships and grants

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This article was originally published in April, 2017. It has been updated.