Yes, raid kid's college fund to pay $30,000 card debt

This hard decision calls for a family meeting (and a new budget)

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Dear To Her Credit,
We currently have a large credit card debt spread over four cards. Our total debt is $30,000. I am thinking of closing out my daughter's college fund to pay off this strangling debt. She is in 10th grade. Good idea? -- Joni


Dear Joni,
Speaking strictly in terms of dollars and cents, you're probably better off closing out the college fund and paying off your credit card debts. I'm guessing that your credit card debts have an interest rate of at least 18 to 24 percent. Let's say your average rate is 20 percent. On a $30,000 balance, you're paying about $6,000 in interest every year.

Meanwhile, your daughter's college fund may be earning 5 percent, or possibly as little as 0.5 percent. As a family, you're losing money every month that you keep high-interest debt while you earn very low interest in an investment or savings account.

Another way to look at it: If you pay off your credit card debt, your interest savings in one year alone, say $6,000, would pay for about two years' worth of tuition at a community college.

Of course, life decisions are never just a matter of dollars and cents. I'm assuming you and your husband have derived a lot of satisfaction from knowing that you were doing right by your daughter. If your daughter knows about the account and has possibly contributed to it, using the account to pay your credit card debt may not go over well.

I suggest that your family have a conversation about where you are financially, and where you need to go. Without laying blame, I'd start the discussion with the premise that $30,000 of credit card debt is totally unacceptable and can be the financial ruin of you if it's not dealt with. As a family, you should also see how the rest of your financial picture is doing. Do you have an emergency fund? Are your cars paid for? Are you making retirement plan contributions? What are your goals for the future -- for all three of you?

Your 10th-grade daughter can give input about her plans, too. Does she want to go to college immediately after high school? Does she know what she wants to take and where? Has she looked into scholarships and grants, and is she doing what she can to improve her chances of getting them?

Cashing in your daughter's entire college fund is not the only way to get out of credit card debt. The three of you could start brainstorming different ways to reach your financial goals. Perhaps you could get by with one less car. It's amazing how much money you can save with one less car payment, not to mention the insurance, car repairs and depreciation. Maybe you can eat out half as often as you do now, and skip the appetizers and drinks. If you create a family budget, you may find other ways to come up with debt reduction funds. Or you may come up with a combination of some college funds, other savings and spending reductions, so you don't have to completely drain the college fund to get out of debt.

Before everyone starts sending me hate mail, let me clarify that I believe helping your daughter with college, if she wants to go, is very important. College funds are a wonderful thing. They're not wonderful or wise when making contributions people can't really afford jeopardizes the overall financial health of their families. I have known people who put money into college funds for their preschool children, to the exclusion of being able to afford a house. Or they faithfully make contributions to an education fund, but not to their 401(k) plan at work -- the plan with the matching employer contributions. That's crazy.

College funds are not the only way to save and pay for college. If you work on your total financial picture while your child is growing up, you will be able to help her with college when the time comes. The worst case scenario is that you have to pull out the credit card to help pay the tuition bill in a few years. At least you will have saved the interest expense between now and then. A much better scenario would be for you to take the interest you save by not having a credit card balance and start stashing away a college fund again. Once you experience living without a credit card balance, you won't want to go back!

A word of caution: If your daughter's education fund is in a tax-advantaged plan, check to see what penalties or taxes, if any, you'll have to pay if you withdraw the funds.

An experience like this is not all bad. Some people say the challenge of paying down debt as a family is actually kind of fun, or at least gives them a sense of accomplishment. It's certainly a learning experience better than any your daughter could get in a personal finance class. You got into debt as a family. You can get out of debt, help your daughter go to college and reach your other financial goals as a family, too.

See related: Over your head in debt? 5 extreme budgeting ideas, Biggest debt losers: How one family triumphed over their credit card debt

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Updated: 01-21-2018