Do you have eligibility to roll over 401k funds into an IRA, and are you getting need-based financial aid? IRA withdrawals for qualified education expenses are not subject to the 10% penalty, so you could skip the loan entirely.
The trick is that the withdrawals are taxable and contribute to your AGI, and increase your EFC. For a school that uses the CSS Profile and meets full need, you may be able to explain this, but for a school that uses a straight FAFSA EFC you might lose aid.