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Paying for College Should Parents Take Out Loans or Tap Retirement Savings?

Posted by anand@lenders.com on December 16, 2015


As you begin to raise a family, responsibilities start to line up. Parents have a lot of struggles to overcome. One of the worst problems that you will encounter is getting your child into college. How is your savings? Did the budget plan you made work or not? If you are starting to have an empty pocket, take a look at possible solutions and pick the best way that will work for you. You can find a better job which offers a higher salary, get a part-time job, or acquire scholarships and grants. Better yet, use retirement savings or get a loan. Here is an overview of the available options:


401(k) LOAN

You can borrow money from your 401(k) plans. You may take it into consideration if you are allowed by your employer and you still have enough retirement savings to support it.


  • It can be lower than the standard bank rates.
  • It is obtainable. You can request it online and credit check is not required.


  • It has borrowing limits. You can only borrow $50,000 or less and it needs to be repaid within five years.
  • You are going to have less contribution to your retirement plan.
  • It is repaid with after-tax money which means you will pay loan taxes twice.
  • Ages lower than 60 must repay the loan in 30 days when they leave their job to avoid the mandatory 10% IRS penalty and taxes on early withdrawals.





You must understand whether the distribution from an Individual Retirement Account (IRA) will go under income tax or penalty. A penalty is charged for the withdrawals from retirement accounts from ages below 60 but there is no penalty if the withdrawal goes towards the expenses for higher education. The distribution will be treated as taxable income.



There are two options: Parent PLUS Loans and Private Parent Loans.


Parent PLUS Loans


  • You are allowed to borrow up to the cost of attendance less all other financial assistance.
  • There are several repayment plans to help you according to your needs.
  • You can delay the loan repayment if you are having a hard time because of deferment and forbearance.
  • Compared to private lenders, financial history requirements are less strict.


  • It has a fixed and higher interest rate compared to subsidized loans.
  • It has a large origination fee that is 4.292%.
  • The terms are limited to 10 or 25 years.


Private Loans


  • It has a lower interest rate than a Parent PLUS loan.
  • Terms are negotiable.
  • Some lenders do not have origination fees.


  • Private lenders do not offer deferment but they can offer forbearance.
  • Traditional banks put restrictions to the amount that can be borrowed.

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