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I know this is the time of year when many of you are considering using some of your hard-earned retirement funds to pay for college and avoid student debt. After all, the market has done quite well over the last three years, so why not?
While it is true that most of what you read on this subject will agree that it is not a good idea to use retirement funds to cover college costs, these articles are not “ringing the alarm” nearly loud enough on this very important issue.
When you learn all the facts, you will discover that it is probably the single worst college funding strategy you can use. Not only do you pay taxes on your retirement withdrawals, but the money you remove to pay for college is assessed as income under the federal and institutional formulas.
So what are the alternatives for college costs?
As Jack Schacht pointed out in a recent blog, consider the merits of the Federal Loan. It’s a painless way for students to pay off their loans and offers forgiveness of any balance in either ten or twenty years.
If you still don’t want to see your students carrying any debt, you can pay back their loans at your leisure after they graduate. That is a much better idea than having those withdrawals assessed as income under FAFSA rules.
Taking a Parent Plus Loan can even be better than taking money from your retirement. If cash flow is a problem when the payments come due, you can pay back your loans through the little-known Income Contingent Repayment Program if you consolidate them.
Though I hate to see parents go into debt to pay for college costs, if you have no source other than your retirement funds to pay for college, I would suggest you “do the math” with your accountant to get an accurate comparison of the financial impact of taking loans versus dipping into your retirement funds.