<p>Hey,
So I am in a unique situation. I am 24 and have been with the same company for 3 years. I currently have a cash balance pension account for 19k and a 401k worth 10k. Both the 401k and pension are fully vested. I am attending Northeastern in the fall and I received pretty good financial aid, about 35k total in grants and scholarships. That still leaves me around 20k per year for 2 years (I am a junior transfer). I know I can rollover my 401k into an IRA when I leave my current company. Then I could use the IRA to fund my tuition penalty free (I would still have to pay taxes on it.) I assume I would lose around 30% to taxes which leaves me with 6-8k in my tuition. Is it possible for me to cash out my pension? I know this would be a bad idea if I was closer to retirement, but every dollar I can save from student loans is worth a dollar fifty after interest. Am I doing the right thing here, in terms of pulling my 401k and pension? My parents aren't helping pay for school (thus the loans and the late start on school). My dad who has literally perfect credit will cosign the loans so that my interest rate is lower. Any thoughts? </p>
<p>Thanks,
Anxiously waiting</p>
<p>Yes, it is possible. There are many companies that offer cash settlements for deferred compensation. However, since it will be forty years before they can collect (and the fact that these companies are typically bottom-feeders preying on poorly informed people with few options), they will likely only offer pennies on the dollar. If my explanation is unclear, I will be blunt - this is not a good idea. $20,000 left untouched with an 8% growth rate will be worth almost $1 MILLION in fifty years when you are ready to retire.</p>
<p>In addition, I would say that cashing out your 401k is a similarly bad idea. I would argue that it is worse to cash out when you are young because you are losing the huge advantage of tax-deferred growth. This option is likely far more expensive than taking loans.</p>
<p>If you have been working for three years, how successful have you been at saving for college? A balance of $10,000 in your 401k means that you have probably only put away a couple thousand in that account each year. </p>
<p>You should qualify as an independent student, so you might try talking to FA again about an appeal.</p>
<p>Mldad,
Thanks for the info. Yeah I am classified as an independent but the financial aid officer was very anti appeal. She basically said that all their money is allocated and I had no chance of increasing it. As for savings for college, virtually non existent because I have been self sufficient. My job is decent but the pay isn’t that great. Affording rent, food, bills in California is about all I can afford. So you would recommend even avoiding the 401k? Assuming I make 60k out of college, wouldn’t it be smarter to put a larger portion in to cover any losses, versus paying the exorbitant loan interest rates?</p>
<p>Bus2012. are you getting any financial aid at all? Also, if you go to school full time this year or next, would you be eligible for the PELL grant? (max $5600)? What is the situation with Northeastern in terms of giving you any financial aid when your income is no longer in the picture? They do not guarantee to meet need, I know, so they could just throw up their hands and refuse to give money to a student in later year that did not qualify for aid the first year. I used to know some people in the administration there, and the school was not generous with financial aid, and down right tight. BUt that was many years ago and the school has changed tremendously since then. </p>
<p>Here is the thing: the year you do take out the money from your 401K, it shows up as ordinary income on your tax returns and yes, you are taxed on it. It also has to be reported as income on FAFSA and PROFILE and your expected contribution take that heavily into consideration, like half is expected to go towards your college . If you plan things right, you might want to take out the money at the most advantageous time, like your senior year when no more FAFSAs need to be filed. You can ask about your pension amount, whether the company will give you a lump sum disbursement. Some do, some don’t. Or have it rolled over into the 401K. That is entirely company policy. If you can come up empty one year, you can get the full PELL, subsidized loans and bug NEU to give you some money and dip into their federal funds of SEOG and maybe Perkins loans as well as their own funds. Do ask the fin aid officers if they include 401k and pension balances of the student in their own need formulas. </p>
<p>Why aren’t you looking at in state options? CA has some colleges for a lot less. $24K a year for a Cal State. A little more for a UC. Plus possible money from the state. And I know they don’t look at intact qualified funds. My son was accepted to NEU, but the cost would have been over a quarter million dollars for him to go there. Yes, they have paid co-op and that will pay for any extra time you spend there, but the bottom line cost was still that much. You are really making big assumptions in thinking you will make $60k right out of college. I know a lot of NEU grads; it’s a popular school here, and yes, they do well, but the vast majority are not making that much for several years out of college. The numbers the schools give out are those self reported by the most successful alums. The guy folding sweaters at the GAP or working Starbucks is not going to be reporting his job success.</p>
<p>I did look at in state. I got into SF state, uc Davis and uc Irvine. The cost with Neu financial aid package is essentially the same. I did file the appeal with northeastern to consider my loss of income so hopefully that will help. Also, assuming 60k isn’t so far out of the realm of possibility. Business week, an independent source, places their average business school graduates at 57500 out of school. Considering my work experience I think 60k is a reasonable estimate. I could be wrong I was just making a note of it that’s all. I have 2 years at NEU, taking out loans for 20k each year so max I am looking at 40k in loans so I am not looking at anything close to a quarter million bucks in debt.</p>
<p>Also, I can’t come up empty this year because I have been working the whole year. I will probably do my Co op next fall which would leave me with income as well for that year, but probably below the cutoff line for a zero efc.</p>
<p>I agree that NEU for about the same price is a great deal. But if you can commute to a UC or Cal State, that would knock a lot off the price. Also, I can’t imagine a state school costing $35K and you would have the full Student Direct loans to put towards them. NEU probably has included those loans in their package to you, so you are dry in that area from the get go with NEU, unless the $30K in aid they have given you are all grants. I don’t think so. You would be a lot closer to meeting the costs with an instate public.</p>
<p>I guarantee you that most NEU grads are not making that much out of college. Those numbers are greatly exaggerated. I know ever so many grads from there–my own son considered going there. It all depends upon the major and the student, and studying the same at a state school would get you there just the same. Maybe a bit of difference, but certainly not the cost differential.</p>
<p>However, you’ve already done a couple of years of school, and may just have two years of tuition to go, so it isn’t as clear as for a kid looking at 4 years of the cost gap. Look at the Sallie Mae student cosigned loans and see what is available to you with your dad as a cosigner.</p>
<p>The only Cal state that I could commute to would be Cal state east bay or possibly SF state. Both fall far far below NEU in the prestige scale, not to mention my intention is to end up living in new England and those schools don’t have much of a support structure for there. I am pretty set on keeping the pension locked down simply because the options are so shady and ripoffish. I got 25k in grants and aid as well as another 3500 from an independent scholarship fund. So I would be looking at 25k a year in loans approx 8k of which would be subsidized. I plan on having my dad take out a PLUS loan for the remaining amount after Stafford loans. He has agreed to do this and the interest and loan origination fees seem much smaller.</p>
<p>My advice is to take the loans for this year, and if you are going to be breaking into your qualified plans, do it your last year so that your financial aid for the subsequent year is not affected. It’s a very heavy hit when you take money out of these plans in that it affects your EFC by alot most of the time. EFC is very heavily income driven. You can repay the loans with the proceeds when your income is no longer subject to being reported for FAFSA?PROFILE purposes.</p>
<p>So my pension lump sum is 6k which would really be 9k because it saves me from 6k in student loans with interest. Monthly payments are 22 a month, assuming I live to 75 it equals 13k. I’m taking the lump sum, I’ll end up throwing away the 22 every month on something stupid versus taking the lump sum and doing something meaningful with it.</p>
<p>The problem with your plan that any monies you take out will be considered income when you apply for financial aid next year, thus decreasing any need based aid that you are eligible for (meaning that you will have to come up with even more money). DO you have a plan to fill the short fall in next year’s financial aid</p>
<p>YOur plan really is not a financially feasible one because it is going to leave you with some exorbitant debt that is going to be hard for you to service because even on the off chance you are making $60k, you won’t actually have 60K to spend (taxes, income, health insurance, rent, and servicing the loan that is going to be over 1k a month).</p>
<p>If california is affordable to you, go to school there.</p>
<p>You say that you presently have 19K vested in your pension plan available as a lump-sum payout. Are you sure that is available now and not on your “Normal Retirement Date”?</p>
<p>Free advice. The very worst thing I ever did was withdraw my retirement monies (from a 401k) when I left a job in my 20s. I thought I needed the money for day to day expenses. If I had left my small amount IN that retirement account until I retired, it would have been a HUGE (think over a million dollars) retirement nest egg.</p>
<p>Leave the money IN your retirement account. In addition to the tax implications now…this is retirement income money you will NEVER be able to replace as in expensively in the future.</p>