Was I Wrong to Give My Daughter’s College Fund to a Relative?

Dear L.,

You could write a social media post about people who need to grow up and pay rent. I’m kidding, of course.

Here’s what I’ll say to your daughter if she is, in fact, a reader of this column: Your parent cared for you enough to invest for your education. That money was intended for your benefit, but your parent still owned the account, which I’m guessing was a 529 plan.

That money grows tax-free when invested in a college plan. But if you were to use the money for purposes unrelated to education, you or your parent would typically owe taxes and a 10% penalty on whatever money the account earned. By giving that money to a family member to pay off their student loan, your parent preserved the tax advantages.

You don’t have to agree with that decision. But remember: This wasn’t your money to begin with. If you choose to continue your education, you still have plenty of options. It’s always disappointing when we don’t get what we expected. But I’m simply trying to explain the reasoning that may have been at play here.

In the meantime, heed your own advice. If you’re frustrated with the people who won’t grow up and support themselves, be the change you wish to see in the world. Paying rent like a self-supporting adult is a good place to start.

Now back to you, letter writer. I have to wonder if your daughter is used to toothless threats from you. You threatened to kick her out if she didn’t pay rent. But so far, she’s correctly called your bluff.

I wonder if her reaction to you giving her college funds to a family member is at least partially one of shock. That’s often what happens when someone actually has to face negative consequences for the first time.

I don’t think it’s realistic to expect her to be thrilled that you gave a relative the money you’d invested for her education. That doesn’t mean you were in the wrong for doing so. But plenty of people choose to delay college for a number of reasons. What I hope is that you communicated with your daughter that this money wasn’t hers to use on her timeline.

You say you thought your daughter had “learned her lesson.” But I’m curious: What exactly is the lesson you thought she’d learned? Did you think she’d learned her lesson just because she hadn’t posted about “deadbeats” and student loan forbearance in a while?

Try to ignore her social media posts. They’re largely a red herring, albeit a very annoying one. A person’s actions say a lot more than their words can convey. So far, your daughter hasn’t started paying rent or enrolled in school. So I think that tells you a lot more than whatever she posts online.

Now it’s time to follow up your words with actions. Make your daughter sign a lease and set up automatic transfers each month. If you’d prefer that she go back to school instead of paying you rent, perhaps you could make an agreement that she’ll live rent-free if she signs up for a specific number of credit hours.

But make it clear that there will be consequences if she doesn’t live up to what she agrees to. Those potential consequences include getting kicked out of your home. That’s what eventually happens to grown-up, self-supporting people if they don’t pay their rent or mortgage.

Your daughter may have chosen not to attend college for now. But don’t let her avoid the school of life any longer.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community.

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