Borrowing Smart When Returning to School or Continuing Your Education

Continuing your education has become standard practice among professionals. Personal circumstances vary among older students and can include more factors than the time and money involved. There are bills to pay, a family to support, and a career to maintain.  Many schools now offer programs which cater to working adults as result of increased demand among working professionals.

Often free resources, such as grants and scholarships, fall short of covering the total cost of school, plus living expenses, leaving you with loans to fill the gap.  Finding smart ways to pay for additional educational needs will impact both current and future financial obligations.

Here is a breakdown of the options for financing your mid-career educational needs.

Federal Student Loans: Available to graduate students seeking a professional or an advanced degrees, loans available for graduate students do not include a subsidized option, meaning interest accrues on the account while in school. However, payments do not begin until after dismissal from or completion of degree program.

  • Advantages of Federal Student Loans: Low-interest rate, currently 5.31% for the 2017-18 school year. No payments while in school. Easy to qualify. Complete the FASFA form and receive up to $20,500 per year for a graduate degree or up to $40,500 if attending medical school. Qualifying does not rely on credit scores, and do not need to establish financial need: Provided applicant is current with existing loans, attend a qualified school, and take at least a half-time course load.
  • Disadvantages of Federal Student Loans: Long repayment.

PLUS Loans: Parents of undergraduate students and graduate students can qualify for PLUS Loans. Eligibility includes attending a qualified school, taking at least a half-time class schedule, and admittance into a degree program. Qualifying requires completion of the FASFA and a credit check. Eligibility factors in the total cost of attendance, including mandatory fees such as tuition, fees, and books, along with the estimated cost of room and board.

  • Advantages of PLUS Loans: The Department of Education guarantees the loan and feature some of the same benefits of Federal Student Loans, such as delayed payments, extended repayment schedules, and consolidation options.
  • Disadvantages of PLUS Loans: You must have good credit, and those with derogatory marks on credit could require a co-signer for approval. PLUS loans have a higher interest rate than Federal Student Loans.

Private Educational Loans: Lending institutions may offer non-government sponsored borrowing options for educational purposes. Qualifications and terms vary across lenders and include a credit check and lender requirements such as debt to income parameters.

  • Advantages of Private Student Loans: Can obtain larger loan amounts for advanced degrees.
  • Disadvantages of Private Student Loans: Carry a higher interest rate, and in most cases, payments while in school. The loans come with more limited repayment options and often do not allow delays in repayment for financial hardships such as unemployment.

Home Equity Line of Credit: Loans secured by a home offer an inexpensive option, with rates as low as prime. Once in place, consumers may draw cash, repay the balance, and take additional advances to meet cash flow needs. Lines of credit require existing home equity, and consumers can use funds for any purpose.

  • Advantages of an Equity Line: Tax deductible interest at low rates, along with interest only payments for the entire draw period, which can be ten years or more. Option to use the funds in myriad of ways, which could include paying for an advanced degree.
  • Disadvantages of an Equity Line: Lack delayed repayment and deferment options found with other options, and require payments at disbursement rather than after completion. Struggling to keep up with the minimum payment could result in home loss. Adding debt could also result in payments well into retirement. A variable rate means rising interest rates, could increase the cost the debt after disbursement.

401K Loans: 94% of employers allow loans against a 401K. The IRS allows borrowing the l 50% or $50,000 of vested loan balances, whichever is less. Some employers include matching balances, while others only allow loans against contributed amounts.

  • Advantages of 401K Loans: Borrowing money from yourself include a low-interest rate and can be a viable option if poor credit eliminates other low-cost You may use proceeds from the loan for any needs without impacting qualifications.
  • Disadvantages of 401K Loans: When taking money from retirement accounts, compound growth is sacrificed . Funds repayment with after-tax dollars, eliminating the tax benefits of the account. A change in employment status accelerates repayment to 60 days. Failure to meet this timetable will often result in a forced withdrawal and any associated penalties. Lastly, the five-year repayment requirement can lead to high payments while in school, before gaining the benefit of higher income.

IRA Withdrawals: You cannot borrow against an IRA, but the IRS allows penalty-free withdrawals for qualified educational expenses. There are taxes on withdrawals at the ordinary income tax rate, and consumers can use funds to pay for the educational needs of one’s self, a spouse, or qualified dependent.  The IRS calculates qualified expenses based on the school’s cost schedule, minus any free assistance such as scholarships and grants.

  • Advantages of IRA Withdrawals: Gain access to funds without repayment requirements.
  • Disadvantages of IRA Withdrawals: Reduces retirement fund balances which can be difficult to replace. Increase taxable income, which can raise your tax bracket.

Borrowing money for educational needs can increase job skills, give better employment opportunities, and increase income in critical earning years. How students pay for additional schooling will have a lasting impact on your finances because of the high cost of degree programs. Maximizing free aid and choosing borrowing options wisely can preserve retirement funds while providing the financial benefits advanced degrees offer.

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