Withdraw or Borrow?
As a parent, you'll explore all avenues to find funds for your child's college costs. Family savings. 529s. Investments. Maybe even your current paycheck. But if all these fall short, is it wiser to make a 401(k) withdrawal or opt for student loans? There are many factors to consider.
401(k) -- Yea or Nay?
PRO: It is possible to withdraw from a 401(k) savings account.
CON: if you're younger than 59-1/2, you may be subject to a 10% early withdrawal penalty.
PRO: It's cash you already have.
CONS: You'll be responsible for income tax on the amount you take out. You're depleting your retirement savings. In the long run, this could mean you'll be working longer than you originally planned. Also, monies you withdraw will be treated as income that could bump you into a higher tax bracket and adversely subsequent years' financial aid awards.
PRO: You are eligible to borrow from your 401(k).
CON: You'll need to pay yourself back in a timely manner--usually within five years. If you leave your job, you might have to pay it back immediately. Anything you don't repay is treated as income, so fees and taxes would apply.
Ideally, your 401(k) plan is best left untouched until you retire.
The Advantages of a Loan
Private student loans, on the other hand, are an alternative way to close the college cost gap.
PRO: You can borrow the money you need now without compromising your retirement savings.
CON: You're signing on for a new loan.
PRO: Payback on some loans is deferred until graduation.
CON: Payback on some loans begins immediately.
PRO: You can borrow only the amount you need to close the tuition gap.
CON: People sometimes borrow more than they actually need.
Private student loans are offered through banks and other lenders, and you can usually apply for them online. As always, do your homework first. Ask potential lenders:
- What is the interest rate?
- Is it a fixed or variable rate?
- What is the term of the loan?
- Is there a yearly loan cap?
- What is the minimum amount I can borrow?
- What is the maximum amount I can borrow?
- Do repayments begin immediately or not until graduation?
- What will my monthly payment be?
What Are the Requirements for a Private Student Loan Application?
There is specific information you’ll need to provide in order to be considered for a private student loan. Among them:
- Proof that your student is enrolled at an eligible school.
- Proof of U.S. citizenship or permanent resident status as defined by your state of residence.
- Tuition, fees, and an estimate of the financial aid you’re approved to receive.
- Income, employment, and credit-worthiness. This particular information will be easy for a parent to provide; less so for a student. Which is why you may have to be a co-signer to the loan.
The Requirements--and Benefits--of Co-Signing
Not all students will be able to easily meet the requirements for a private student loan. Your help may be needed in sharing the responsibility for repaying the loan if the student cannot. Co-signers must:
- Have a verifiable income.
- Have a good credit history of borrowing, charging, and repayment--with few or no late payments on your credit report.
- Show no excessive delinquencies, judgments, or bankruptcies pending, filed, or discharged in the previous two years.
- Be a U.S. citizen and at least 18 years of age.
One of the better aspects of being a co-signer is that your commitment may help reduce the interest rate of the loan. Also, many private lenders will release the co-signer from the loan once a total of 24 consecutive, on-time payments have been made.
At Nitro, we understand the impact college expenses have on people's lives. That's why we want to help you ask the relevant questions--so you can make the decision that's best for you, your student, and your financial futures. Allow us to put our years--decades--of experience to work for you and check out the best banks for private student loans.