Losing a job can throw a wrench into anyone’s financial plans. Imagine you’re Mark, 59, and your daughter, Mary, recently headed off to final year at her dream college. The fall semester was off to a great start, until Mark lost his job unexpectedly.
Before that, he was earning $100,000 per year. When combined with his wife’s salary of $95,000, their dual income created plenty of wiggle room for big expenses — including Mary’s $36,000-a-year tuition. But with their household income now cut in half, Mark and his wife, Karen, are now grappling with how to pay this bill.
Mark’s first instinct is to dip into his retirement savings. But Karen isn’t too sure about that idea and think they should take out a personal loan instead.
With tuition due in full in a few short months, this family isn’t sure which is the best move to cover their daughter’s final year of college.
Mark had hoped to quickly find another job. But a quick assessment of the job market has dampened his hopes of finding a comparable job anytime soon. Although he’s actively applying for jobs, he expects the process to take at least several months, if not more.
In 2024, the average job seeker spent between two and six months searching for a job, according to Career Group (1). And with the job market slowing, it’s possible it could take even longer for Mark to reclaim a similar income.
With his income slashed, Mark and Karen should work with their daughter to update their Free Application for Federal Student Aid (FAFSA). In addition to making the necessary changes through Studentaid.gov, Mark should reach out to the school’s financial aid office to update them about the changing family finances. This office may be able to help the family find new financial aid opportunities.
Mark and Karen could be in a relatively precarious financial situation. Let’s say the household spends around $10,500 per month, and, since the job loss, their expenses have outpaced their income by about $3,000 per month, not including any tuition costs. If they had around $18,000 in emergency savings, that would give them six months of breathing room at their current spending levels to cover their costs until Mark gets another job.
Let’s assume the couple has about $450,000 saved for retirement across their 401(k)s. However, Mark has only just turned 59 and Karen is 56, meaning they wouldn’t be able to tap into those funds without paying an early withdrawal penalty. The couple agree they don’t want to pay a 10% early withdrawal penalty. Even if they did, making a withdrawal from their retirement account likely wouldn’t be a good idea.
According to a LendingTree study, 68% of parents would consider withdrawing money from a retirement account to pay for their child’s education (2). In many cases, it may be the only large sum immediately available and, unlike other drastic choices, such as selling a home, the consequences aren’t immediate.
That doesn’t mean it’s a smart move, however. Most experts agree that raiding retirement funds should be avoided, particularly when the figures so far saved aren’t particularly high and there’s little time left to make up for it.
Mark and Karen fall into this category. They are just a few years from the traditional retirement age of 65, and their retirement account balance is behind the median of $537,560 for savers in their age group(3). If they were to reduce their balance, the possibility of having to work lots more years and potentially reduce their quality of life in retirement would increase even more.
Since retirement savings are off the table, it’s time to look at other options.
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After speaking with the financial aid office at Mary’s school, let’s say the family receives a $11,000 grant to help cover some of their upcoming tuition bills. While they might be relieved to receive some offer of assistance, that would still leave $25,000 to cover for the fall and spring semesters.
If the financial aid office also offered to help Mary secure a part-time job, at the campus library let’s say, and she could make $12 per hour, after taxes, and could work 15 hours per week, with 30 weeks of work across the fall and spring semester, she’d earn $5,400. She could put that toward her living expenses, which would help ease another worry for her parents.
Mark and Karen could also withdraw funds from Mary’s 529 plan, which is earmarked specifically for educational expenses. If they could take out, say, $7,000, they could use it for the tuition bill, getting it down to $18,000.
From here, Mark and Karen have increasingly difficult choices to make. While they could drain their emergency savings to foot the bill, that would leave them in a vulnerable financial position.
Mark wants to use all of their emergency savings. But Karen isn’t comfortable with that idea. In a compromise, they could put $3,000 of their emergency savings toward the tuition bill. Although that lowers their emergency fund to $15,000, they could trim their costs to make it stretch for as long as possible.
With $15,000 left of the tuition bill, Mark could look around the house to find anything that they could potentially sell for a windfall. If he were to part with some of his tools, he might pull together another, say, $4,000 to put toward the tuition costs.
At this point, the family is out of ideas on how to pay the remaining tuition costs without taking on debt. While Mark and Karen don’t want to turn to debt, there seems to be no other choice. They could consider taking out a personal loan in their own names to pay for their daughter’s remaining tuition costs. But after carefully exploring the costs, let’s say they decide the best course of action would be for their daughter to tap into federal student loans instead.
Federal student loans tend to come with significantly lower interest rates than other borrowing options. For example, a Direct Subsidized Loan carries a rate of 6.39%, which is significantly lower than the average personal loan interest rate of about 12%. Mary could take out a Direct Loan with a 6.39% interest rate for $11,000 to pay off the rest of the tuition.
Although it would take some creativity and perseverance, Mark, Karen and Mary would be able to finish paying for Mary’s college degree. At the graduation stage, they’d all breathe a big sigh of relief. And when Mark gets a new job, he would be in a position to help Mary pay off her student loan balance.
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Career Group (1); LendingTree (2); Edward Jones (3);
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.