How Should We Pay for College?
Posted June 23, 2014
Updated June 24, 2014
WRAL Reader Question
I'm going back to school for a master degree. We currently have no debt other than the mortgage. We also have enough money saved for retirement. We can pay for school out of the 6 month rainy day account or take a loan for 80K at 4-6% interest. My income when I get out of school should be around 90K/year.
What is the best way to pay for the graduate education?
Loan from 401K?
Equity from the house?
Click here to get my free my weekday email newsletter with the latest tips and advice on how to beat debt and do better financially. Subscribe now.
I'm at first concerned that you think a loan can be obtained from your 401(k) for 4-6%. Most people get that wrong and I understand why. The nominal interest rate is what is charged to borrow money from your own account but you also have to factor in the lost returns while that money is borrowed. Over a longterm that figure is huge. In a growing market that 4-6% can actually cost you 14-16% when you factor in the increase you missed out on. And it can ultimately cost you tens, if not a hundred thousand dollars, when you project lost returns 40 years out.
The downside with home equity loans is you are placing a further lien against your home and creating an obligation that if you are unable to pay may lead to the loss of your home. It's an informed risk you should be aware of.
So that leaves us with the least risky alternative of a government student loan. Stay entirely away from any private loan.
If you decided to go the government loan route you could leave your 401(k) growing, leave the house at less risk, and if something happened in the future and your income was reduced you would have access to some good alternative repayment options.
Just my opinion.
WRAL Get Out of Debt Guy
If you have a credit or debt question you'd like to ask about, how to get out of debt, just click here and ask away.
If you'd like to stay posted on all the latest get out of debt news and scam alerts, subscribe to my free newsletter.