Stories
College Costs: Borrow for Child's Education or Tap Retirement Savings?
- •Parents often face a dilemma between taking an education loan for their child's higher education or withdrawing from their retirement savings.
- •Emptying retirement funds is risky as it's harder to replenish them closer to retirement, potentially forcing parents to work longer or reduce future expenses.
- •Education loans spread the cost, prevent large one-time withdrawals, and allow students to contribute to repayment after employment.
- •Parents should calculate the actual funding gap, considering scholarships and family cash flow, rather than borrowing the maximum amount.
- •A combination of dedicated education savings and a smaller education loan can be an effective strategy, avoiding full depletion of retirement funds.
Key Questions Answered
Parents should generally avoid emptying their retirement corpus for college fees. Unlike a student who can take a loan and repay it over time, a parent nearing retirement has fewer years left to rebuild a depleted corpus.
An education loan spreads the cost over several years and prevents a large one-time withdrawal from long-term family savings. Additionally, Section 80E of the Income Tax Act allows eligible individuals to claim a tax deduction for the interest paid on a qualifying education loan.
Yes, parents can use a mix of both options by funding part of the cost from savings specifically set aside for education while using an education loan for the remaining balance. This approach keeps the loan size manageable without entirely wiping out retirement accounts.
