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Paying for College


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4 minutes ago, Nomad said:

He has a pension the 401K is just additional savings.

Yeah.  I know he does.  Can never have too much money socked away though.  I would certainly assist my child in any way possible though, so that would certaibly be the priority. 

Send him to med school or law school and then he can take care of you, er, your friend later down the line.  🤣

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13 minutes ago, electric10162 said:

The problem is.....once you take out the money it's gone forever unless you can borrow against it. An old friend used to tell me....save your cash and assets...use someone else's money and borrow.

I understand, but at some point the money has to be paid back.  Perhaps a good time to skim some money off the top now while it is high than take from a smaller amount when it crashes.  Biden etc.

Edited by Nomad
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8 minutes ago, optowalt said:

Have the kids take out fed loans.  They don't get paid back till 6 months after they graduate and the money grows till then.  Also if they default, it doesn't affect you. You can always gift them the money later.  Then it's a tax deduction. 

He doesn't qualify for any Federal loans.  FAFSA.  Parents have jobs.

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3 minutes ago, MPSR said:

I haven’t touch my 401k in 20 years. Yea it crashed a few times, (Divorce)however taking it out would cause fees and such, unless you have a Roth IRA, your always best bet is the student loans... 👍

Ours is different. No penalties or fees if you take out after retirement.  Of course you have to pay the taxes.

Edited by Nomad
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3 minutes ago, Jcol6268 said:

If he’s 18, the amount of money he would take out would be a HUGE mistake. Look at what that money would earn versus all of that being in student loans. Compounding interest is a powerful tool and the most important time to start it is now. 

The loans would be a big mistake?  Not following you.

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Do not take money out of your 401K to pay for college.  Period.  And this is coming from a college professor.

There are two important things to consider here:  The return on investment for college, and the time value of money.

In my personal opinion and experience, paying for college is a waste of money.  Instead, I would encourage people to go two years at a community college and then find the most inexpensive state school to finish out your four-year degree.  The vast majority of employers will never look at the school you went to, and even if they did, they don't care.  You could probably get a degree this way for the same expense of going to a "good" school or one with a recognizable name.  School name and reputation really only come into play when you are getting a Master's or Doctorate degree.  And even then, I would not take out money from a 401K to pay for it.

The second is the time value of money.  This is a very important concept in finance.  The time value of money is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity.  Think about it:  $100 fifty years ago bought a lot of stuff due to the value of $100 at the time.  Now, $100 buys a whole heckuva' lot less.  If you were to take $100 and invest it in the Dow Jones Stock Index in 1970, what would it be worth today?

912889938_ScreenShot2021-01-12at11_16_11PM.thumb.png.a8e05d63feeec8a36c2a212b22b79fcc.png

(From: https://financial-calculators.com/historical-investment-calculator)

That investment would earn on average 7.5% interest over time.  You'd end up with $3,648.00 at the end of the investment.  It means that the $100 in 1970 earned $3,548.00 for you!  You did nothing, but that money worked for you and earned more money.  If you invested periodically over time, which is what you do with a 401K plan, your average rate of return would be higher, and you'd have a heckuva' lot more money too.

College loans are dirty cheap now.  I have one left from my MBA program, and I think it's a whopping 3.5% interest.  That's not a bad rate, and educational loans are usually very low interest to begin with.

So the question becomes this:  Does he want to spend the money now out of his 401K to save 3.5% in interest, or keep it in there to earn 7.5% interest (last year my investments returned about 20%, his may be higher)?  The better financial decision is to hold onto the money and allow it to accrue and compound interest at a higher rate than to lose that earning potential to save in the near term.

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Quite a few ways to look at this really. In my mind, the question becomes, do you plan to pay the bill, or do you want your kid to pay the bill?

If you take it from your 401k, most plans allow for a hardship withdrawal to cover education costs, but you will owe tax on this if your account was funded with pre-tax money.

If your son takes out loans, then he is on the hook for the loans, plus interest, so he'll be starting out deeply in the hole, at the age of 22. But who knows, the whole student loan forgiveness may actually happen.

One cheaper option is to start off at a community college, then transfer as many credits as possible to a more advanced school later. Taking online classes while living at home can also save a lot of money. Apply for EVERY scholarship & grant possible. 

Just my opinion, but before I paid 10 cents for college, I'd want to be convinced that my kid was committed & dedicated to whatever field of study he decided to pursue. With the price of college these days, it shouldn't be looked at as a "life experience", but rather an investment to help get a place in the job market.

Good luck with whatever you decide to do!:up:

Edited by Stan Putz
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