Use savings, get loans, or do both?

SlitheyTove
Tue, 10 Apr 2012 12:21:32 +0000

If the retirement savings are in a qualified retirement account (e.g. IRA (Roth or non), 401k, 403b), then there can be big tax repercussions to taking out money prior to retirement. There are taxes that must be immediately paid, there may be penalties, and if you’re taking out funds that are earning interest tax-free, you’re giving up the tax-free earning power of that investment. There may be some exceptional circumstances where that’s justified, but paying for college doesn’t make it in my book. I’d sooner be a cosigner on loans, and then help pay them back when I started taking withdrawals from those accounts. If the loan amounts were too large, I wouldn’t be cosigning. I’d be telling my child that the school was unaffordable.

My children don’t need my permission to take out Staffords (though they do need me to file the FAFSA to do so). If they did, I might decide to gift them the repayments. Or I might have them repay it themselves.

If your retirement money isn’t in a tax-advantaged retirement account, you’re not getting 6.8% these days, and your FAFSA is going to assume that 5.6% of that savings goes towards paying for college each year. I’d go talk to a flat-fee certified financial planner, because I’d need to know what’s best to do.