Hi, Helaine: I have two sons who will be entering college in 2021 and 2022. My husband and I did the Maryland prepay plan for several years. But we quickly realized they might not want to stay in Maryland, so we stopped contributing. Then we got divorced three years ago and stopped saving for college altogether.
So I am wondering: Is it smart to borrow from your 401(k) and repay yourself because you are paying the interest to yourself, not an institution? Or is it more harmful because you essentially take that money away from potential growth in the market? -- College Mom
Dear College Mom: There are no do-overs when it comes to retirement planning. Do not risk your financial future to pay your children's college tuition bills, no matter how tempting it is.
I'm guessing you haven't contributed to a 529 account or otherwise put aside money for college because you believe you can no longer afford to do so. Borrowing money from your 401(k) to pay for college stands to make your financial situation worse.
As you know, when you take money out, that's money you are not investing, costing you potential gains. Second, if you borrow money from your 401(k) and then lose or leave your job and you are younger than 59 1/2, you will most likely need to repay the sum within 60 days, or you will pay the 10 percent penalty for early withdrawal as well as face a bill from the tax man. Moreover, if you lose or leave your position, the chances are good you won't repay that loan.
Finally, while you can use the money placed in the Maryland Prepaid College Trust (as it is properly called) toward the tuition bill at out-of-state or private colleges, it's quite possible that won't be necessary. As much as your children might not want -- to quote you -- to attend your state university, it might just be the right decision financially.
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