Paying for graduate school out of your 401k. Stupid idea?

July 3, 2009 4:28 PM

Paying for graduate school out of your 401k. Stupid idea?

I have been working on a masters degree for some time now, paying out of my own pocket. It is not cheap, but I believe it will be worth it in the long run.

However, some extra income I was counting on to help me fund my tuition didn't materialize, so it looks like I could run out of money before I finish graduate school. I've been thinking about tapping into my 401k to cover the rest of my tuition, but I have a feeling that might be a stupid idea. Is it?

P.S.: I am not a permanent resident in the US, so student loans are not an option for me.

posted by falameufilho to education (8 comments total)

Can you give us more specifics? How much longer do you have to go? How much do you have left to pay? How much are you going to tap out of the 401k? Any other income?

As for your masters...you say you've been working on it for some time now? How much time, and how much money have you already spent?

Just trying to get a handle of the situation.
posted by hal_c_on at 5:04 PM on July 3

Making withdrawals from 401Ks in most plans is not possible unless there's some sort of catastrophic event or you've reached retirement age. The best option to consider would be a 401K loan where you pretty much borrow the money from the fund. You're not penalized for taxes as long as you pay it back and the interest rate would be cheaper than most credit cards and other unsecured loans.
posted by birdherder at 5:08 PM on July 3

I've been on it for one year and I probably have 2 more to go (it's part-time). I probably have to spend about 40-50k until completion, I believe that will amount to more than 1/2 of my 401k (considering I will be taking money out of it regularly for 2 years).
posted by falameufilho at 5:12 PM on July 3

The best option to consider would be a 401K loan where you pretty much borrow the money from the fund.

This is correct.

Moreover, funding education is probably one of the very few reasons you would ever do this with a 401(k). Go for it if the numbers are working.
posted by Cool Papa Bell at 6:14 PM on July 3

It partly depends on what your studying too. An MBA or something in medicine or law is entirely different than art history or french literature.
posted by crapples at 7:41 PM on July 3

Tapping your 401(k) in this way is almost certainly a bad idea. Unless you can pay all of the money back within five years, you are going to have to both pay taxes and a 10% penalty on the money you withdrew as an unauthorized early distribution. Given that we're talking about $40-50k, I find it rather difficult to believe that a masters degree is going to give you sufficient income to pay down that level of debt in that short a time. We're talking just under $1000/month. Normal student loans would be under $550/month, given the much longer duration there.

While we're on the subject, student loans are totally an option for you. Federally-funded ones may not be, but just because the federal government won't loan you money doesn't mean that Chase or Citibank won't.

Also, if you aren't a US resident, what the devil are you doing with a 401(k)?
posted by valkyryn at 8:19 PM on July 3

@valkyryn - I am a legal US resident, just not a permanent resident (means I don't have a green card, but other type of visa).
posted by falameufilho at 8:56 PM on July 3

You can withdraw money from your 401(K) to pay for higher education. You pay tax on the withdrawn amount as ordinary income, but not the additional 10% penalty for early withdrawl.
See pages 58-59 in IRS Publication p970 "Tax Benefits for Educatiion," for details.

Note that this ordinary income for, say, 2009, reduces eligibility for need-based grants or scholarships in the following 2010.

I remember an annual limit of approximately $10,000 for loans from 401(k)s to pay for college, but saw no reference to it in the p970 index. Try searching at irs.gov.
posted by doncoyote at 9:56 PM on July 3 [1 favorite has favorites]