Loans or Retirement Account to Pay for College?

money-is-time
Remember the birth of your child?

As new parents we set out to give only the best to our children.   The first time they wrapped their tiny little hand around our finger we made a promise to give them the best. With that promise, of course, also came the responsibility of saving for college.

Fast forward eighteen years later

The time has come to live up to that promise.  If you are like most parents, however, life didn’t make it easy for you to save all of the money needed for your children to attend the school of their choice and that 401(k) retirement account started to look like a good solution to your problem.

Before you cash in your 401K to pay for college, consider this:

  • Keeping your money in your retirement account gives you tax-deferred investment income with compound interest.
  • If you are younger than 59-1/2, there is a 10% penalty on taking the money out of the retirement account.
  • You will have to pay income taxes in your tax bracket on all or part of the money withdrawn on top of the 10% penalty.
  • Any 401K or IRA withdrawals during the base income year will cause your EFC to sky-rocket, thereby reducing your aid eligibility.
Is it really worth it?

Even though it may seem like a necessary solution, remember that your retirement account is for retirement.

Is the loss of compound interest, paying a 10% penalty and taxes, having to work a few extra years, and missing out on the opportunity to receive free money in additional financial aid worth it?  If I were you, I would find another solution.

So what’s the solution?

Assuming you have no equity in your home (still my first choice for borrowing money), most experts will tell you that taking the Parent Plus Loan is better than raiding your retirement accounts.

In an interview with Wall Street Journal columnist Al Lewis,  MCPT founder Jack Schacht noted that the Parent Plus Loan can even be a smart strategy for some families.