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Should You Raid Your Kid's College Fund to Pay Off Debt? Financial Experts Say Not So Fast

MarketDash Editorial Team
17 days ago
A South Carolina father asked financial advisors if he should tap his children's 529 college savings to accelerate debt payoff. Their response was a hard no, pointing to the real culprit draining his finances: vehicle loans worth $45,000.

Here's a scenario that probably sounds familiar to more parents than would care to admit it: You've got debt piling up, a kid's college fund sitting there with actual money in it, and you're wondering if robbing Peter (your child's future) to pay Paul (your truck loan) makes any sense.

Michael from South Carolina brought exactly this question to "The Ramsey Show," asking whether he should tap his children's 529 college savings accounts to accelerate his debt payoff. Co-host George Kamel's response? "I would not crack open my child's piggy bank to essentially make my truck payment."

The bluntness was warranted once you hear the full picture.

From $90,000 to $65,500: Progress With a Catch

Michael deserves credit for turning things around. After taking Dave Ramsey's Financial Peace University, he completely overhauled his approach to money. He cut up most of his credit cards and started throwing extra income at his balances.

The results speak for themselves. In January, Michael owed roughly $90,000 spread across 10 credit cards and two vehicle loans. Ten months later, he had knocked that down to about $65,500. That's legitimate progress.

But he wanted to go faster. Enter the 529 question.

Years ago, Michael had opened 529 plans for both kids, putting about $4,000 into each account. When his older child finished a year at community college and decided school wasn't for them, he rolled those funds into his younger child's account. Today, that combined account holds around $11,500.

His pitch to the hosts: Should he pull that money out now, even with the tax hit and penalties, or let it grow for another eight or nine years until his younger child heads to college?

The Math Doesn't Add Up

Kamel and co-host Jade Warshaw shut this idea down fast. Once you factor in taxes and the 10% early withdrawal penalty for non-education expenses, Kamel explained, "that $11,000 quickly turns into seven grand." Worse, pulling the money now would "unplug the growth" that could otherwise help cover future education costs.

Then Warshaw zeroed in on the real problem: vehicles. Michael confirmed he's carrying about $15,000 on a 2022 Hyundai and another $30,000 on a 2024 Toyota truck he originally bought for $54,000.

That's $45,000 tied up in depreciating assets.

"It's too much of your world to have this much tied up in vehicles that are going down in value," Warshaw said. She wasn't wrong. While Michael was contemplating raiding an education fund for $11,500 (which would net him maybe $7,000), he was sitting on a truck worth less than what he owes on it.

The Alternative Plan

Both hosts offered a different path forward. "I would be selling that truck and working extra," Kamel said. The message was clear: make changes to your own budget and lifestyle before you start touching money set aside for your kid's future.

Michael's dilemma isn't unique. Rising vehicle costs, stubborn credit card debt, and competing financial priorities squeeze families constantly. The temptation to grab available cash wherever you can find it makes sense emotionally, even when it doesn't pencil out financially.

The hosts emphasized that aggressive debt payoff is good, but raiding a 529 comes with real consequences beyond just the immediate tax hit. You lose years of compounding growth and potentially limit your child's educational options down the road.

Sometimes the fastest way forward isn't the smartest way forward. In this case, it's hard to argue with their logic: if you need cash that badly, sell the truck that's bleeding value anyway, not the college fund that's actually growing.

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Should You Raid Your Kid's College Fund to Pay Off Debt? Financial Experts Say Not So Fast

MarketDash Editorial Team
17 days ago
A South Carolina father asked financial advisors if he should tap his children's 529 college savings to accelerate debt payoff. Their response was a hard no, pointing to the real culprit draining his finances: vehicle loans worth $45,000.

Here's a scenario that probably sounds familiar to more parents than would care to admit it: You've got debt piling up, a kid's college fund sitting there with actual money in it, and you're wondering if robbing Peter (your child's future) to pay Paul (your truck loan) makes any sense.

Michael from South Carolina brought exactly this question to "The Ramsey Show," asking whether he should tap his children's 529 college savings accounts to accelerate his debt payoff. Co-host George Kamel's response? "I would not crack open my child's piggy bank to essentially make my truck payment."

The bluntness was warranted once you hear the full picture.

From $90,000 to $65,500: Progress With a Catch

Michael deserves credit for turning things around. After taking Dave Ramsey's Financial Peace University, he completely overhauled his approach to money. He cut up most of his credit cards and started throwing extra income at his balances.

The results speak for themselves. In January, Michael owed roughly $90,000 spread across 10 credit cards and two vehicle loans. Ten months later, he had knocked that down to about $65,500. That's legitimate progress.

But he wanted to go faster. Enter the 529 question.

Years ago, Michael had opened 529 plans for both kids, putting about $4,000 into each account. When his older child finished a year at community college and decided school wasn't for them, he rolled those funds into his younger child's account. Today, that combined account holds around $11,500.

His pitch to the hosts: Should he pull that money out now, even with the tax hit and penalties, or let it grow for another eight or nine years until his younger child heads to college?

The Math Doesn't Add Up

Kamel and co-host Jade Warshaw shut this idea down fast. Once you factor in taxes and the 10% early withdrawal penalty for non-education expenses, Kamel explained, "that $11,000 quickly turns into seven grand." Worse, pulling the money now would "unplug the growth" that could otherwise help cover future education costs.

Then Warshaw zeroed in on the real problem: vehicles. Michael confirmed he's carrying about $15,000 on a 2022 Hyundai and another $30,000 on a 2024 Toyota truck he originally bought for $54,000.

That's $45,000 tied up in depreciating assets.

"It's too much of your world to have this much tied up in vehicles that are going down in value," Warshaw said. She wasn't wrong. While Michael was contemplating raiding an education fund for $11,500 (which would net him maybe $7,000), he was sitting on a truck worth less than what he owes on it.

The Alternative Plan

Both hosts offered a different path forward. "I would be selling that truck and working extra," Kamel said. The message was clear: make changes to your own budget and lifestyle before you start touching money set aside for your kid's future.

Michael's dilemma isn't unique. Rising vehicle costs, stubborn credit card debt, and competing financial priorities squeeze families constantly. The temptation to grab available cash wherever you can find it makes sense emotionally, even when it doesn't pencil out financially.

The hosts emphasized that aggressive debt payoff is good, but raiding a 529 comes with real consequences beyond just the immediate tax hit. You lose years of compounding growth and potentially limit your child's educational options down the road.

Sometimes the fastest way forward isn't the smartest way forward. In this case, it's hard to argue with their logic: if you need cash that badly, sell the truck that's bleeding value anyway, not the college fund that's actually growing.