If you have children attending college who are not covered by scholarships and grants, you may want to help them finance the cost. This can take a big bite out of your retirement savings. Consider that the cost of attending a four-year college ranges from $14,000 to $32,000 per year, depending on the educational institution. If you are faced with such a decision, the question then becomes, which option is the most suitable?

Some financial professionals caution against using your retirement savings to pay for your children's college education, because while loans can be obtained for to cover the cost of college, loans are usually not available to cover retirement expenses. If you are faced with such a dilemma, the following are some of the options that can be factored into your decision-making process.

Explore Scholarship Opportunities
Except in cases where students are offered scholarships as part of their acceptance package, colleges are usually reluctant to offer scholarships. If you child is in need of financial assistance, consider making an appointment with the financial aid department to discuss the matter with someone authorized to approve scholarships. Most colleges have reserved funds for these and other purposes. They may also have scholarship amounts received from organizations that have not yet been allocated to students. It may be necessary to explore college options that were not on your child's list of colleges he or she wanted to attend in order to get scholarships.

Colleges usually allow student to work up to a certain number of hours per week while attending college. The income earns can be used to help cover the cost of attendance.

Federal loans
This includes Perkins loans, direct Stafford loans and Direct PLUS loans. The following table compares these loans options for undergraduate degrees.

Perkins Loans

Direct Subsidized Loans:
Direct Unsubsidized Loans
Direct PLUS Loans
Low-interest loans for students with financial need.
Student can borrow up to $5,500 for each year of undergraduate study, up to a total of $27,500.
A Federal Perkins Loan is a low-interest (5%) option. The college is the lender, and the loan is made with government funds.
The college reviews the student\'s Free Application for Federal Student Aid (FAFSASM) and determines the amount the student can borrow. The student is not charged interest while in school at least half-time and during grace and deferment periods.

The student is not required to demonstrate financial need to receive a Direct Unsubsidized Loan. The college will determine the amount the student can borrow. Interest accrues from the time the loan is first paid out. The student can pay the interest in school and during grace periods and deferment or forbearance periods, or allow it to accrue and be capitalized.
Parents of dependent students may apply for a Direct PLUS Loan to help pay their child\'s education expenses as long as certain eligibility requirements are met.
Source: http://studentaid.ed.gov/PORTALSWebApp/students/english/funding.jsp Visited April 13, 2012.

Private Loans
These can be taken by the student or parent. For loans that are taken by the student, the financial institution may require a co-signer, who would be responsible for making repayments in the event the student is unable to meet their repayment obligations. In some cases, the ability to get loans will depend on your credit score. If you are unable to obtain loans, and prefer not to use your own savings, consider the following:

  • Using your regular (non-tax deferred savings) means using amounts that have already been taxed.

  • If you liquidate capital assets, including stocks, you may be required to pay capital gains on any earnings.

  • Amounts withdrawn from your tax-deferred retirement account will be subject to income tax, except for amounts that represent basis. Basis is attributed to non-deductible IRA contributions and after-tax amounts in 401(k) and 403(b) plans.

  • Amounts withdrawn from your IRA are exempted from the 10% early distribution penalty if the amount is used to cover eligible expenses, which includes room and board, tuition, and books. If the amount is not used to cover eligible expense, a 10% early distribution penalty will apply to such amounts, unless you qualify for one of the exceptions to the penalty.

  • Amounts withdrawn from your retirement accounts are no longer eligible for the tax-deferred treatment available to such accounts.
If you have savings in a qualified plan or 403(b) plan, and the plan allows for loans, you have the option of borrowing up to the lesser of $50,000 or 50% of your vested account balance. This loan must be repaid in level amortized amounts, at least quarterly over a five-year period. Failure to repay the loan as required could result in the amount being rerated as a taxable distribution to you.

Serious consideration should be given to the idea of using your savings to pay for your child's college education. Before making such a decision, discuss the matter with your financial advisor and have him or her perform an analysis to determine the extent of any negative impact on your retirement goals and objectives. If paying for your child's college education from your savings would adversely affect your retirement planning goals and objectives, and you are unable to (or prefer not to) obtain loans, your child could choose to work full time and attend college on a part-time basis. If the company that he or she works for offers a tuition reimbursement program, it could mean having no student loans.

Next: The Complete Guide To Retirement Planning For 40-Somethings: Life Cycle Changes »

comments powered by Disqus
Trading Center