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Mrcurious · Sep 20, 2006, 09:54 AM

Hi,

I will be starting school very shortly. I need additional funds to cover both tuition and cost of living. I am debating whether I should take money out of my 401K to cover these expenses or if I should take out some additional loans. I am already borrowing some money through a Federal Stafford student loan.

I guess the thing to do would be to calculate whether the interest I would pay on the additional loans would end up costing me more than the penalties/loss of income growth from the 401K removal.

Lets say theoretically, I was going to borrow an additional $10,000 at 7% annually. Assuming it takes me 4 years to pay it back with the principal decreasing $2,000 every year, I'd be looking at annual interest payments of roughly $700 + $560 + $420 + $280 or a total of $1,960 In interest.

If I compare the $1,960 interest expense to what $10,000 could do in my 401K if left alone for 30 years or so, it seems like it would make sense to leave the money in the 401K and pay the interest on the loan, even though I think I can avoid the 10% penalty for early withdrawal since I am going to school.

Any thoughts feedback appreciated.

Thanks!!

Harry

kp2171 · Sep 20, 2006, 10:47 AM

Id go with the student loan.

Leave 401K money alone if at all possible.

What kind of loan rates are you getting? I think we just got 4% on loans for our daughter in college.

ScottGem · Sep 20, 2006, 11:33 AM

How about borrowing from the 401K? Even if you do avoid the withdrawal penalty (and I'm not sure you would), you will also need to pay taxes on the amount withdrawn.

Mrcurious · Sep 20, 2006, 11:45 AM

I am no longer employed since I am going to school so I don't believe that is an option.

ScottGem · Sep 20, 2006, 12:09 PM

Ok, that may not be an option, but I would still leave withdrawal as a last resort.

Fr_Chuck · Sep 20, 2006, 03:21 PM

I would always ask why not go to school part time and work. Then you will not be deep in debt when you do graduate.

AtlantaTaxExpert · Sep 20, 2006, 04:48 PM

Go with the loan. The interest is tax deductible (unless you make over $120K married).

Losing the growth on your 401K is a loser anyway you look at it.

Mrcurious · Sep 21, 2006, 09:36 AM

Thanks for the advice! Much appreciated.

KP2171 - How did you get a 4% loan? Was this recent? The loans I am being offered are at the prime rate, about 8%.

ScottGem · Sep 21, 2006, 10:34 AM

Student loan rates are standardized. I think new loans are now at 8%. If you consolidated, it was around 5%.