Personal Finance
Sending You to Google News in 3
© Jack_the_sparow / Shutterstock.com
The question comes up on call-in shows constantly: a parent staring at a credit card statement they cannot pay, looking sideways at the 529 plan they have been funding since the kids were toddlers. On a recent Ramsey Show episode, a caller named Cheryl asked exactly that question, and the answer she got was not the one she was hoping for. The hosts pushed back hard against the idea of touching the kids’ college money to clean up adult debt.
The instinct is understandable. The money is sitting there. The debt is bleeding interest. Why not just rip the bandage off?
Here is why the math, and the rules, almost always say no.
The typical scenario:
The data backs this up. The U.S. personal savings rate has fallen from 6.2% in early 2024 to 4% in the first quarter of 2026, while consumer sentiment sits at 53.3, deep in pessimistic territory. Core PCE inflation is in the 91st percentile relative to historical norms, which means the squeeze families feel is real. Wages have risen to $37.41 an hour on average in April 2026, but not fast enough to outrun the cost of everything else.
So families look at the 529 and think: that is liquid, sort of. Let’s use it.
A 529 plan carries strict withdrawal rules. Pulling money out for anything other than qualified education expenses triggers two costs on the earnings portion: ordinary income tax at your federal and state rate, plus a 10% federal penalty. Contributions come back tax-free, but the growth gets hit twice.
Run the numbers on a $30,000 account that has grown from $20,000 in contributions. The $10,000 of earnings gets taxed as income (call it 22% federal plus state) and hit with the 10% penalty. That is roughly $3,200 to $3,800 in friction before a dollar touches the credit card balance. You withdrew $30,000 and netted closer to $26,000.
A $20,000 credit card balance at 22% APR costs about $4,400 a year in interest. The Fed funds rate sits at 3.75% today, but credit card APRs barely moved with the cuts. The card companies kept the spread.
The tension is straightforward: a guaranteed 22% return on debt payoff sounds great, until you realize you are paying a 13% to 19% haircut just to access the money, and you are permanently shrinking an account that was earmarked for a future bill you still have to pay somehow.
For most families, the realistic options come down to three:
Before touching the 529, write down two numbers: the APR on every debt, and the monthly amount currently going into the college plan. If pausing contributions and throwing that money at the highest-rate debt clears the balance within 18 to 24 months, the 529 stays untouched. That is the answer for most families.
The common mistake is treating the college fund as an emergency fund. It is a tax-advantaged account with penalties specifically designed to keep you from doing exactly what you are thinking about doing. The IRS built a fence around that money for a reason. Climb it only when there is no other ground to stand on.
Austin Smith is a financial publisher with over two decades of experience as an investor, analyst, and advisor. He covers stocks, ETFs, Artificial intelligence and personal finance for 24/7 Wall St. Previously, he spent over a decade at The Motley Fool as a senior editor for Fool.com, portfolio advisor for Millionacres, and launched The Ascent to help reader take control of their personal finances.
His work has been featured on Fool.com, NPR, CNBC, USA Today, Yahoo Finance, MSN, AOL, Marketwatch, and many other publications. He is as an advisor to private companies, and co-hosts The AI Investor Podcast with Eric Bleeker.
When not looking for investment opportunities, he can be found skiing, running, or playing soccer with his children. Learn more about Austin’s investment approach here.
Our top personal finance-related articles today. Your wallet will thank you later.
On a recent episode of Suze Orman’s Women & Money, a 50-year-old caller named Andrea explained that she had $33,000…
"When you owe the government money, they’re not very happy. And you probably owe the government money with pulling out…
Brian Preston of the Money Guy Show recently distilled a quiet crisis into one number: “57% of Americans, that this…
The hosts of the How to Money podcast, on Friday Flight episode #1131, drew a line most parents funding a…
A woman called The Ramsey Show in tears. “About 3 years ago I had discovered that my husband had amassed…
On a June 16 Ramsey Solutions debt-free stage segment, Scott and Kim from Applegate, California announced they had paid off…
Dave Ramsey’s call-in show pulls in real households at their worst financial moments. A recent episode laid out three patterns…
A 30-year-old caller named Dan phoned into The Ramsey Show with a question his lender had already half-answered for him:…
It sounds nearly impossible on paper: a couple with a $250,000 annual income somehow is still running a $5,000 monthly…