Sen. Rand Paul (R-Ky.) has introduced a bill that would allow students and parents to make penalty-free withdrawals from retirement funds to pay for college or repay their student loans.
Not surprisingly, investment advisors are worried that Rand’s solution to rampant student loan debt may create more financial problems than it solves—especially as retirement rolls around for woefully unprepared Baby Boomers and their adult children.
“This is politics from people who know nothing about finances. You don't rob from your future to pay for college,” Ed Snyder, president of Oaktree Financial Advisors in Carmel, Ind., told Financial Advisor.
Rand’s Higher Education Loan Payment and Enhanced Retirement Act, or HELPER Act, introduced this week, would allow Americans to take out up to $5,250 from a 401(k) or IRA tax- and penalty-free each year to pay for college or make monthly student loan payments. Individuals can also take out funds for educational expenses for spouses or dependents.
If two parents each have retirement accounts, for example, they could withdraw over $10,000 cumulatively each year to pay for their child or dependent’s education. While 18-year-olds don't typically yet have a 401(k), it is possible they could take funds out of a Roth or traditional IRA if they set one up.
Americans owe more than $1.6 trillion in student loan debt, according to some estimates, and the price of college continues to increase each year.
The bill would also allow employer-sponsored student loan repayment plans to be tax-free up to $5,250 per year and repeal the cap on the student loan interest deduction, which starts phasing out once modified adjusted gross income reaches $57,000 per year.
That’s a potential bright spot in the bill, considering nearly nine out of 10 recent graduates with student loans look for employers offering student loan repayment assistance, according to a survey of around 2,600 U.S. adults by Abbott, a health-care company.
A looming question, however is, should investors ever draw from retirement to pay for college, especially given that most Americans are already struggling to save enough for retirement?
Brandon Opre, founder of TrustTree Financial in Huntersville, N.C., said the only way he could see such a scheme working is if an investor took the 401(k) distribution in the form of a loan for which they had repayment obligations. “At least that way, you are paying your 401(k) loan back. The only other way I can justify a 401(k) withdrawal is if you get an employer match ... and you can consider that payment towards student debt."