05/14/2013 11:17 am ET Updated Dec 06, 2017

Would it be Better to Pay Cash for College or Borrow from My IRA?

Reader Question

Dear Steve,

I quit my full-time job to finish my degree. I got my AS in Chemistry & was able to get a job in my field two years ago.

After realizing that I wasn't going to be promoted without a degree, at the rate I was going it was going to take 5 years (BS Chemistry & BA Economics) I and saved up $16,000 in various savings, I quit my job and went to school full-time.

I am on track to graduating this December with honors plus I have been "offered" 2 jobs (nothings in writing, just through networking). I am turning 25 this September.

What would be better to cover my $18,000 cost of tuition, fees and living costs: liquidate my Money Market account ($5,500) and my Roth 401K ($8,000) and borrow $5000 in subsidized loans or take more subsidized student loans and not touch my Roth 401K?

I can borrow up to $7,550 in subsidized loans.


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Dear Michelle,

First off, congratulations in completing your degree and so cost affordably as well. Kudos to you. It's so nice to hear from someone that isn't loaded down with $150,000 or more of student loan debt.

From my point of view the answer lies both in math and reality.

The reality is the earlier you invest for retirement, the more it will grow and that can make a huge difference by the time you retire at 82.

I realize that people have the best of intentions of putting money back and funding their IRAs again to get back in the same spot after they drain them. But you know what, it just rarely seems to work out that way.

So from my point of view I'd much rather have you protect the IRA and let it grow than touch it even if it made mathematical sense. Besides, touching the IRA comes with taxes and penalties if you cash it out.

What I would suggest is you take a second look at what your IRA is invested in and make sure you are in something with a good track record and performance. Even a stock index mutual fund has a very impressive track record. One fund I just looked at has a 10.77% return since inception.

So if you just leave the $8,000 in your IRA and don't touch it or add anything more to it, by the time you reach 82 it would be worth about $2,723,000.

I'm just using 82 as an assumed age at which you draw on those funds. Who really knows when you retire but what is safe to assume if you will be working longer than my generation. But even if you drew on those funds when you were 70 they'd still be worth about $798,000.

So there is the gamble. Risk the future value by not getting the cash back in quickly to put you back in the same spot or protecting the IRA and paying a small bit of interest to borrow the money to payoff the degree.

What choice do you think you'll make?

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