(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Roth IRA Roth IRA contributions can be withdrawn tax-free for any purpose.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.Continue reading→