Is it a bad idea to withdraw funds from an IRA to pay tuition balances? I have read withdrawlas for this purpose are penalty free but could potentially limit the federal aid received from the college. Would the student still be entitled to Stafford Loans, etc.?
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Students who file FAFSA are always entitled to the basic student loan of 5 to 7.5k per year.
Are you saying you are getting a Pell Grant? That is the only other federal entitlement. And income could affect that yes. Income can also affect aid you are getting from the institution.
What is the situation?
Penalty-free if used for this purpose but not necessarily federal and state income tax-free.
How. I have do you plan to use? Is this the on,y way you will be paying for college costs? If so, I’ll give you my opinion. Don’t do it.
Bad idea?
The bigger question is: if u withdraw from your IRA now, what are u going to live off of when you’re 65?
Hi, thank you for responses. No we are not getting a Pell grant. We were looking to satisfy balance due after scholarships and the Stafford Loans were applied to my daughter’s tuition. Private loans have such high interest rates. We have yet to apply for a PLUS loan which I believe the interest rate is 6.84% right now… was an idea my husband mentioned last night. Didn’t realize that we would be subject to interest and taxes on the money withdrawn. No matter what sounds like you are being hit with interest charges all the way around unless you have a big fat savings account, which is not the situation. 
In your case, it sounds like Plus loans would be best as long as they’re not for huge amounts. The advantage of Plus loans is that if the either the signer or the child were to die, the loan is forgiven. That would not be the case with a private loan. And if you had done the IRA withdrawal and someone were to die, you’d still have the monetary loss.
Next summer, try to have your child find full summer employment. those earnings could also be applied to some of this, lowering the amount that you have to borrow.
Since it sounds like you don’t have much in savings, you really need to lessen the amount borrowed because how can you pay it back?
Another option: a monthly payment plan thru the school. Or maybe do both.
Is this for freshman year?
How much is the shortfall/gap?
Was the gap a surprise (did some other source of funding fall through) or did circumstances suddenly change (job loss)?
You might qualify for the American Opportunity Tax Credit of up to $2500 for 4 calender years. See IRS Publication 970. If this is news to you then that is potentially up to $10k you weren’t counting on.
It is not interest on the withdrawal, but INCOME that may be the problem. The withdrawal will most likely be included as income on your taxes, so if you withdraw $10,000, that amount will be added to your income for the year. You’ll pay taxes on that amount, but also it might increase your EFC, it could push you into the next earning level and disqualify you from tax credits. For example, a single parent earning $80k would still qualify for the AOTC, but $90k in income for the year gets no AOTC.
Are these IRAs with your employer? Can you borrow against your account?
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Is this for freshman year?
How much is the shortfall/gap?
Was the gap a surprise (did some other source of funding fall through) or did circumstances suddenly change (job loss)?
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Good questions.
Has your daughter already started school? If not, would it be wiser for her to attend a less expensive school? Do you have younger children to put thru college so you’ll be facing this year after year after year after year?
We see this sort of thing every year. The tuition bill is due, parents weren’t able to set aside as much as they had hoped to pay it off, and suddenly are scrambling for loans…just because they don’t want to disappoint the child at such a late date. The thing is…if the family can’t pay much/anything now, then paying back loans later may not be possible, either.
Have you checked to see if the school has a monthly payment plan? If so, that may be your saving grace. They’re usually interest free. If you got into trouble at some point, you could still do the Plus Loan.