Paying for college: 5 top mistakes
Mistake No. 4: Using retirement money to pay tuitionIf you withdraw money from your 401(k) or IRA to pay tuition bills, Uncle Sam will not make you pay the customary 10 percent early withdrawal penalty as long as the money is used to pay qualified education costs such as tuition, room and board, and fees for you, your spouse, your children or grandchildren. But that doesn't mean it's a good idea.
You will still have to pay income taxes on all or part of the money, and you'll have less money on hand to fund retirement. The money also will count as income when you fill out next year's financial aid form, so it will reduce the amount of financial aid you will be eligible to receive next year, Kantrowitz says.
Mistake No. 5: Using home equity to pay tuitionHome equity loans historically have been a popular way to pay for college because the interest paid is usually tax-deductible, and the interest rates are usually lower than for credit cards and private student loans. But now home equity loan rates are hovering near 8 percent -- higher than the interest rate on most federal student loans. And with home prices on the decline, the loans are harder to get.
If you get a home equity loan, that money can hurt your financial aid eligibility. Cash in the bank -- even if it came from a loan -- is factored into your expected family contribution when you fill out the FAFSA, Kantrowitz says.
Home equity lines of credit have variable interest rates, and therefore come with their own set of problems, says Brad Huffman, a Certified Financial Planner with Future Finances in Columbus, Ohio. "They fluctuate with prevailing rates, so the loan could become expensive down the road when interest rates increase."
What's more, "College funding has become one of the greatest burdens for many near-term retirees," Huffman says. "Do not create financial ruin so that Junior can go to college."
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