(Many people have heard that this deduction is alive and well, but the deduction is only allowed if the loan is used to buy, build, or substantially improve the home that secured the loan. College funding doesn’t qualify.) In contrast, you can deduct interest paid up to a maximum of $2,500 for the PLUS loan.
Impact of this funding source on financial aid: Your home equity is not reported as an asset on the FAFSA. It’s better to use a home equity line of credit than a home equity loan so you can rightsize the withdrawal; any unspent money from a home equity loan counts in the EFC calculation.
Roth IRA Roth IRA contributions can be withdrawn tax-free for any purpose. And while you’ll typically face taxes and a 10% early withdrawal penalty if you take out investment earnings from your Roth before age 59 1/2, the 10% penalty usually assessed for early withdrawals from an IRA is waived if funds are used to pay for college tuition, books, fees, and other qualified expenses. (You will pay tax on any earnings portion you withdraw.)
The downsides: The yearly contribution amounts for a Roth IRA are much smaller than for a 401(k) or 529, at $6,000 for those younger than 50 and $7,000 for those older than 50. If you were depending on the Roth IRA to help fund your retirement, using it to fund college costs could seriously deplete your savings. Even if you plan to pay it back, you are depriving yourself of years of tax-free growth and distributions.
Life Insurance Cash-value life insurance policies pay a death benefit, and if you start investing in them early enough, by the time your kids are ready to leave the nest you could have a substantial cash balance to borrow against
Impact of this funding source on financial aid: Wait until after second-year FAFSA is filed. Parents‘ retirement accounts are not counted in the financial aid calculation unless you take a withdrawal from them to pay for college. Then they are counted as income in terms of the expected family contribution.
The downsides: Cash-value life insurance policies can be expensive and investment returns are often low. In addition, interest is charged on the loan from the cash balance (and you don’t pay it to yourself, as with 401(k) loans). If you take a withdrawal that exceeds the amount you’ve contributed, you will owe income tax on the earnings distributed.
Impact of this funding source on financial aid: Wait until after second-year FAFSA is filed. The cash value of a life insurance policy is not reported as an asset on the FAFSA. However, distributions from a cash-value life insurance policy are counted as income in terms of the expected family contribution.
401(k) Loan You repay 401(k) loans with interest, but you pay the interest to yourself. You must make periodic payments and the entire loan balance needs to be repaid within five years.
The downsides: If you leave your employer before the loan is repaid you will be taxed at ordinary income tax rates on the loan amount, and you will also pay a 10% penalty. Also, even if you pay the loan back as planned, the opportunity cost of keeping that money on the sidelines could be big.
Life Insurance Cash-value life insurance policies pay a death benefit, and if you start investing in them early enough, by the time your kids are ready to leave the nest you could have a substantial cash balance to borrow against
Impact of this funding source on financial aid: Wait until after second-year FAFSA is filed. Parents‘ retirement accounts are not counted in the financial aid calculation unless you take a withdrawal from them to pay for college. Then they are counted as income in terms of the expected family contribution.