Borrowing Wisely for College
When it comes to saving for a child's education, most parents have the best of intentions. But with the rising cost of tuition and the downward trend in the economy, many parents are coming up short. Borrowing is becoming a reality for many parents. Here is some advice for borrowing wisely.
Out Plus Loans
The PLUS loan interest rate is variable and may change annually, but will never exceed 9 percent. Repayment of principal and interest begins 60 days after the funds are disbursed, and the standard repayment term is up to 10 years.
Interest paid on a student loan may be tax deductible - up to $2,500 per year - depending on your income level. For 2004, full deductibility is phased out if your adjusted gross income is between $50,000 and $65,000 for singles and between $100,000 and $130,000 for married filing jointly.
Tax-deductible interest is one of the key selling points of home equity loans. In most cases, the interest on up to $100,000 in principal is tax deductible. That gives home equity loans an advantage over PLUS loans, which have both limits on how much interest can be deducted in a given tax year, as well as income requirements for taking the deduction.
It is important to keep in mind that borrowing against your home is not a decision to be taken lightly. Your failure to meet payments puts your home at risk.
to Life Insurance
All Else Fails
That said, most 401(k) plans allow you to borrow half of your vested amount, but not more than $50,000, at a moderate interest rate. And, since the interest you pay goes back into your account, you are essentially paying yourself interest. The loan must be repaid within five years. Should you leave the company, you need to pay back the loan in full. Otherwise, the outstanding amount is treated as an early withdrawal subject to a 10 percent withdrawal penalty, plus income taxes.
IRAs are another source of income for covering college costs. Generally, when you withdraw from a Roth or traditional IRA for qualified higher education expenses for yourself, spouse, child or grandchild, you owe federal income tax on the amount withdrawn, but are not subject to the 10 percent early withdrawal tax that typically applies to IRA withdrawals made before the account holder reaches age 59-1/2.
Before you borrow from retirement funds, you should consider whether delaying college may be a better option, allowing you the time to save more money.
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