Parents draining retirement and home equity for college should rethink their approach

Rising College Costs and the Strain on Families

As the 2026-27 academic year approaches, parents are feeling the pressure more than ever. The cost of higher education continues to climb, placing an increasing burden on families to cover tuition, room and board, and other living expenses. According to Sallie Mae’s annual “How America Pays for College” survey, which has tracked this data since 2009, the average annual cost of college in 2024 was $30,837, including room and board. This figure is up 9% from the previous year and nearly back to pre-pandemic levels.

The list price at some elite institutions can reach as high as $100,000 per year, but the actual amount families pay is often significantly lower due to financial aid, scholarships, and grants. However, even with these supports, many families still face a steep financial challenge.

Saving for College: A Long-Term Strategy

Parents have roughly 18 years to save enough to cover a significant portion of their child's college costs. However, savings typically only cover a fraction of the total expense, with the remainder coming from current income, scholarships, grants, parent and student loans, and family gifts.

In 2025, about 58% of the money used to pay for college came from parental income, with an average contribution of $9,500. Meanwhile, 32% of funds came from 529 college-savings plans, a figure that has remained relatively stable over the years. While this shows that some families are adopting smart financial strategies, it also highlights a lack of awareness about the benefits of 529 plans.

The Role of 529 Plans in College Savings

529 plans offer tax advantages that make them a powerful tool for saving for college. Unlike other savings vehicles, earnings in a 529 plan grow tax-free, and withdrawals for qualified education expenses are also tax-free. Despite these benefits, only a third of families use 529 plans, which suggests there is still a gap in financial education around college savings.

The average withdrawal from a 529 plan increased from $6,800 to $10,000 in 2025, likely due to growth in account balances driven by stock market performance. This trend indicates that more families are leveraging their 529 savings, but there is still room for improvement.

The Problematic Nature of Borrowing

For many families, borrowing is necessary to cover the remaining costs of college. While traditional student loans remain a common option, the report highlights a growing trend of families turning to nontraditional sources, such as home equity loans, credit cards, and retirement-account loans.

In 2025, 6% of families took out home-equity loans or lines of credit, compared to 10% in 2024. However, the average amount borrowed this year was $5,800, a 100% increase from the previous year. Similar trends were observed with parent credit cards, retirement-account loans, and other forms of borrowing.

Rick Castellano, vice president of corporate communications at Sallie Mae, noted that while the reasons for this shift are not entirely clear, factors such as rising home values and improved savings flexibility may be playing a role. He also pointed to the strong willingness of families to stretch financially for higher education, which could explain their choice of funding sources.

The Importance of Tax-Advantaged Savings

While borrowing may seem like a practical solution in the short term, it comes with long-term risks. Taking money from a 401(k) or using credit cards can lead to higher interest costs and reduced retirement savings. In contrast, 529 plans offer a tax-efficient way to save for college, allowing families to grow their savings without the burden of taxes.

Despite the benefits, awareness of 529 plans remains low. Many families are unfamiliar with how they work or what qualifies as a “qualified expense.” Recent changes to 529 plans, however, may encourage more families to take advantage of these accounts in the future.

The Future of College Funding

The data from Sallie Mae’s survey underscores the ongoing challenges families face when paying for college. While some are making progress by using 529 plans and other savings strategies, others are relying heavily on borrowing, which can create long-term financial strain.

The key to reducing the burden on families is to encourage early planning and the use of tax-advantaged savings vehicles. With the right approach, families can build a stronger financial foundation for their children’s education without sacrificing their own long-term goals.