Here’s a brief rundown of some other ways to pay for college, including borrowing from your retirement accounts, taking a loan against your cash value insurance policy, or borrowing against your home equity.

Before you tap into these sources, however, evaluate them alongside all your other options, including federal, state, and college financial aid programs.

Loans from employer-sponsored retirement plans. Some 401(k) and 403(b) plans allow you to borrow a portion of your vested balance for your child’s college education.  Each plan has its own repayment terms, loan limits, and other restrictions, so check with your employer for specifics. 

Before dipping into your retirement savings, however, consider that your child has his or her entire working life to repay college loans. In contrast, you can’t replace your savings once you withdraw money from your retirement plan.

Moreover, if you quit or get laid off with an outstanding loan you’ll generally have to repay it quickly.  Otherwise, the IRS will consider it a withdrawal and you’ll owe regular income taxes, and if you’re under age 59 ½, a 10% early withdrawal penalty.

Home-equity loans.  If you’re a homeowner, another option may be a home-equity loan, which allows you to use the equity in your home as collateral to borrow money. Since you’re putting your home on the line, only borrow an amount you’re certain you can repay and get serious about repaying the loan as soon as possible.

You can borrow a lump sum, which you repay in monthly installments over a set period, or you can borrow as you need it from an established line of credit, paying interest only on the money you actually use. Interest on home-equity loans is either fixed or variable, and is generally tax deductible up to $100,000.

Loans from cash value life insurance policies. Cash value life insurance, including whole life, universal life, and variable universal life, allows you to borrow against your built-up cash value, generally at favorable rates. 

The disadvantage: While your loan is outstanding the unpaid loan balance reduces the policy’s death benefit. Therefore, your beneficiary will receive a reduced death benefit in the event of your death.

Retirement IRAs. When you make early withdrawals for qualified higher education expenses from either a traditional IRA or Roth IRA, the 10% penalty that is usually imposed when you make withdrawals before age 59 ½ is waived.

Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for attendance at an eligible educational institution. Room and board also qualifies if a student is enrolled in college at least half time.

Before you consider your IRA as a source of college funds, make sure you understand all the consequences.

For traditional IRAs, early withdrawals will escape the 10% tax penalty when you use the money for qualified higher education expenses.   But you’ll still owe regular income taxes on any deductible contributions you made and on your accumulated earnings. What’s more, you’ll be siphoning off money from your retirement savings that you can’t replace.

For Roth IRAs, you can make withdrawals for any reason up to the amount of your original contributions without owing federal income taxes or penalties. And the 10% penalty is waived if you withdraw any earnings for qualified education expenses before the account has been open for at least five years and before you’re age 59 ½. On the downside, you’ll owe income taxes on money that would have eventually been free from federal taxes had you left it invested.

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

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