The Insider: College Admissions Advice from the Experts

In part one of this blog, we explored some of the reasons why using a 401k/403b loan to pay for college can be a risky strategy. In part two, we will talk about some of the additional challenges of that strategy and some alternative options.

Most companies allow their employees who use retirement plans like 401ks and 403bs to borrow from these accounts to pay for things that occur before the employee retires. These are not considered withdrawals, and the employee pays the loan back, with interest, over a short period of time. Employees like the idea of “borrowing from myself and paying myself back” and the ease of setting these loans up. However, a 401k/403b loan is a risky college finance strategy that does not always work. In part one of this blog, we’ll look at a few of the reasons why.

Parents often tell College Coach’s Saving for College experts that all, or a large part, of their plan to pay for college involves loans or withdrawals from their 401ks or 403bs. We try to help them find an alternative college finance strategy, as using these accounts to pay for college can be expensive and ruin a parent’s retirement security.

It seems hard to pick up a newspaper these days without running into advice from College Coach finance expert, Robert Weinerman!

Did you invest in a prepaid tuition plan? Is your child about to go off to college? Congratulations if you answered yes to both of these questions! You probably got a great rate of return and have some of your son’s or daughter’s tuition already paid. And here’s some more good news: all that investment growth you got from paying for college in the past will be tax free to you when you use the Plan to pay for college today. All prepaid tuition plans are 529 plans (except the Massachusetts Prepaid Plan, which derives its tax-free status from another section of the federal tax code) and share all of the tax benefits of 529 savings plans.

Would you turn down $2,000 of free money?  No? 

Applying for financial aid can be a bewildering process, and it’s all too easy for overwhelmed parents to make seemingly small mistakes that end up costing them thousands of dollars.  In a recent Wall Street Journal article, Rachel Louise Ensign, with assistance from the nation’s leading college finance experts including College Coach’s own Alex Bickford and Robert Weinerman, details some of the most common mistakes in college finance.  Examples include:

As a College Coach Finance Educator, I often speak with anxious parents willing to explore any means possible to pay for their child’s college education. How many more scholarships can we apply for? Should we refinance our house? Perhaps sell a vital organ? It surprises me, therefore, how many parents are surprisingly resistant to one financing option: student employment. Their concerns are legitimate — working students may have added stress and less time to study — but there are a myriad of benefits, financial and otherwise, that should be considered.

As spring turns to summer, the challenge of applying for college ends and the challenge of paying for college begins.  Though that first college bill can be daunting, remember that you have 3 options to pay for college:  you can tap your savings (your accumulated past income), pay as you go (out of your current income), or you can borrow (committing your future income to pay down education debt).  Choose 1 strategy or combine all 3!

Happy 529 Day — aka Educational Savings Day (5/29, get it?).  A toast to all the savers!