Going back to school: student loans vs borrowing from IRA

Question

Preamble about where I am right now:

1. Late 40s
2. In the USA
3. Modest car loan, no mortgage, no credit card debt
4. No spouse or children
5. About $200,000 in a traditional IRA, another $50,000 in a Roth

Although I already have a bachelor’s degree, I want to change careers, starting with a bachelor’s degree in a mostly unrelated field. I’ve carefully selected a single state school where I reside to apply to and I have a good chance of being accepted, so I estimate I will pay in-state tuition of about $12,000 per year.

Reviewing the degree requirements, I have calculated I can earn my degree in three years as a full time student. Tuition combined with three years of living expenses plus books and other costs, my estimate for the total I will spend in those three years is $100,000.

When the term I have applied for starts, I expect to have $40,000 - $50,000 saved in non-retirement accounts.

I’m very confident I will be able to work part time while taking classes, but I don’t expect to be able to work more than ten hours a week, if that. Being conservative, I’m estimating earning around $20,000 (after taxes) over those three years, and even if I’m generous I very much doubt I can earn $50,000 - $60,000 and still keep up with degree requirements.

So I’m facing a deficit of $30,000 - $40,000.

Taking for granted (please) that I’ve thought a lot about all of my options and have firmly decided that waiting or studying part time will not get me where I want to be, my question is:

To cover the deficit, is it better to borrow against my IRA or take out student loans? Or some combination?

Answer 1

You can't borrow from a Traditional IRA. If you pledge your IRA as collateral for a loan it is treated as a disbursement and subject to taxes (and penalties).

You can borrow from a 401(k) (if your company allows it) but you lose out on the future growth of the amount you borrowed. The hope is that the market grows at a lower rate than the rate you pay in interest. In addition, if you leave your company, the loan may be due in full (again depending on the policies of your company).

You can use a Roth IRA to pay for secondary education without penalty, so I would consider tapping that before borrowing from a 401(k). You're still borrowing from your retirement funds - it's just up to you to pay yourself back as fast as possible to recoup the growth you're missing out on.

Or wait a year or two, save money like mad in a 529 plan (that also grows tax-free) and don't borrow against your retirement.

Answer 2

Who says you have to pay tuition? Once you quit your job and reduce your income to $12,000/year, you become a very low income/high asset student. Apply for financial aid:

Non-traditional students who will be quitting a job to go back to school should ask the college financial aid office for a “professional judgment” review to adjust the income from prior tax year income to estimated award year income.

https://finaid.org/otheraid/nontraditional