A column on personal finance prepared by the Virginia Society of Certified Public Accountants


(August 23, 2004) — When it comes to saving for a child’s education, most parents have the best of intentions. But with the rising cost of tuition and the downward trend in the economy, many parents are coming up short. Borrowing is becoming a reality for many parents. Here is some advice from the Virginia Society of CPAs for borrowing wisely.

Check Out PLUS Loans

For a relatively inexpensive source of education funds, parents of dependent undergraduate students can turn to PLUS (Parent Loans for Undergraduate Students), a federally sponsored student loan program. With PLUS loans, creditworthy parents can borrow up to the full cost of a child’s tuition at attractive rates. Qualifying for a PLUS loan is dependent solely on your credit history — not your income or assets.

The PLUS loan interest rate is variable and may change annually, but will never exceed 9 percent. Repayment of principal and interest begins 60 days after the funds are disbursed, and the standard repayment term is up to 10 years.

Interest paid on a student loan may be tax deductible — up to $2,500 per year — depending on your income level. For 2004, full deductibility is phased out if your adjusted gross income is between $50,000 and $65,000 for singles and between $100,000 and $130,000 for married filing jointly.

Borrow on the Equity in Your Home

More and more people are turning to refinancing, home equity loans, and home equity lines of credit as sources of funds for meeting college expenses. These resources work particularly well for families who have insufficient cash flow but significant equity in their homes.

Tax-deductible interest is one of the key selling points of home equity loans. In most cases, the interest on up to $100,000 in principal is tax deductible. That gives home equity loans an advantage over PLUS loans, which have both limits on how much interest can be deducted in a given tax year, as well as income requirements for taking the deduction.

It is important to keep in mind that borrowing against your home is not a decision to be taken lightly. Your failure to meet payments puts your home at risk.

Look to Life Insurance

For life insurance policy owners, whole life insurance policies represent another source of cash available at rates lower than those charged on PLUS loans. The amount you can borrow depends on how long your policy has been in effect, how old you were when the policy was issued, and the death benefit amount. With most policies, you can choose to repay the loan at your own pace, or not at all. Be aware that if you don’t repay the loan, the policy’s death benefit is reduced by the outstanding amount.

If All Else Fails

CPAs say you should borrow against your retirement savings only as a very last resort. While the terms are not bad, you miss out on tax-free compounding. Most importantly, you put your retirement at risk by using those funds for education and depleting valuable sources of retirement income.

That said, most 401(k) plans allow you to borrow half of your vested amount, but not more than $50,000, at a moderate interest rate. And since the interest you pay goes back into your account, you are essentially paying yourself interest. The loan must be repaid within five years. Should you leave the company, you need to pay back the loan in full. Otherwise, the outstanding amount is treated as an early withdrawal subject to a 10 percent withdrawal penalty, plus income taxes.

IRAs are another source of income for covering college costs. Generally, when you withdraw from a Roth or traditional IRA for qualified higher education expenses for yourself, spouse, child or grandchild, you owe federal income tax on the amount withdrawn, but are not subject to the 10 percent early withdrawal tax that typically applies to IRA withdrawals made before the account holder reaches age 59 1/2.

CPAs point out that before you borrow from retirement funds, you should consider whether delaying college may be a better option, allowing you the time to save more money.

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at

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Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional

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