Smart use of your employee tuition benefit

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Dear Dr. Don,
I will be returning to college as an adult freshman. My employer will reimburse me for all tuition and expenses at the end of each semester. My question is whether I should use my personal savings to pay for school with the understanding that I’ll be reimbursed. Or, should I seek a federal subsidized loan and repay that after I’m reimbursed from work?

— Keith Collegian

Dear Keith,
If you can get a subsidized federal direct student loan, you should use that. That’s better than raiding your own savings to fund college costs until your employer reimburses the costs.

Subsidized federal direct student loans don’t accrue interest while you’re in school, as long as you’re enrolled at least as a halftime student. For subsidized loans, the federal government also covers the interest expense for the first six months after you leave school. Why use your own money when Uncle Sam is prepared to spend?

If you have the financial discipline to save your employer reimbursements, you can earn interest until you get out of school. You’ll owe income taxes on the interest earnings. That’s different from your own plan to repay the loans at the end of each semester. You’d be borrowing each semester and saving the employer reimbursements to pay off the loans after graduation.

A potential problem with this approach is that your savings account balance counts toward the aid calculations in your annual FAFSA application. If your have much savings, it’s possible you’ll be disqualified for subsidized loans in the future. That’s not a huge issue for you, however, since you really only need to borrow the equivalent of one semester’s education.

You are, however, charged a fee to get the loan. The loan fee is 1.073 percent for funds disbursed on or after Oct. 1, 2014 through Oct. 1, 2015. That will eat into your net return.

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