Hi folks, I'm an unusual case. I'm 52 and starting law school this fall. I've not been offered any scholarship money from the school I'll be attending (I do continue to pester, though).
I know there will be folks out there that want to suggest that law school is a bad idea for me. But I've thought it through, I'm definitely doing this, and that's not why I'm posting today.
I currently have $126K in 401K/IRA money which will all be turned over into IRAs once I quit my full-time job in August. Pulling money from an IRA for educational purposes spares me the 10% penalty that I would have otherwise incurred. I recognize that I'll have to pay income tax on the money I pull out but, trust me, I'll have made squat this year so it'll all come out in the wash come tax time (should get about 3K back next spring). I also will have about 20K in a savings account by August.
I make less than 24K a year in my job and have one dependent. Looks like I'm going to be offered $20,500 in Stafford loans for the upcoming school year (and presumably for my 2nd and 3rd years?). I will have other expenses that will come to about $1000 per month (rent, insurance, food, etc.). I also have to share my daughter's undergrad tuition expense with my ex. She's got two more years. That'll cost me about 20K total.
So...I guess my question is...(a financial guru I am not), at my age, do I use the loan money? Right now my retirement funds are earning more than 6% interest (the same interest charged on the Stafford loans). But do I really want to be 60K in debt when I pass the bar at 56 years of age? But then again, I have no other debt...nuthin'.
Who's got a creative angle for me? Thanks!!
The right answer from a financial perspective is to retake. If you are determined to go, there are certainly things you can do that make more financial sense, but without knowing your specific situation none of the following should be taken as professional advice. Talk to a CPA before trying any of it. You should take a day and talk to a financial professional anyway to sketch out the different scenarios, because the difference could be thousands of dollars.
Do you always claim your daughter as a dependent, do you trade with your ex, or is it worked out so whoever gets the biggest tax benefit claims her? Also, is she 23 or younger? Assuming you can claim her, and you aren't currently married, then you should ensure you work enough to make between $8,000 and $10,000 each year by any means necessary in order to take advantage of the Earned Income Credit and Education Credits (again, assuming your daughter doesn't earn a ton of money on her own - by hitting the sweet spot of income the government will be paying you several thousand dollars each year you are eligible).
The interest rate on Stafford loans is currently 6.8%, and there is a 1% origination fee, so the actual cost of borrowing is higher than 7%. Unlike whatever your retirement funds are invested in (probably stocks or some kind of mutual fund, and probably not an investment that just pays 7%+), by not taking out the loan you are guaranteed that rate of return. I would say take out between 12,500 - 17,500 from your IRA each year for four years (2013, 2014, 2015, 2016) - you don't want your Adjusted Gross Income too high. You will have two years in which you are head of household and claiming two exemptions, so your tax burden will be extremely minimal (if you itemize, if may be even less) and will be more than offset by the credits.
You should also be putting 6,500 into a Roth IRA each year, starting with this year (if you don't have a Roth IRA account, open one). Withdraw a little extra money from your IRA if you have to (up to the allowed exemption for educational expenses). The reason is that you'll only be earning 8,000-10,000 dollars, so your tax bracket will be very low, and you won't be paying any penalty because of the educational exemption. This means you can turn money that was not yet taxed into money that will never be taxed without paying a penalty or that much in tax at all.
Take out loans to cover the difference.
But really, you should retake.