Caller Steve has a whiz-kid for a son, but is borrowing money to pay for his college education a good decision?
Scott: We'll talk here with Steve. Steve, you're with Hanson McClain.
Steve: Hi, good to talk to you guys.
Pat: Hi, Steve.
Scott: How are you?
Pat: Thanks for joining us.
Steve: Well thanks for having me. I really appreciate it.
Pat: What can we do for you?
Steve: Well, probably like a lot of people, I have a teenager who's getting ready to finish up with high school and is going to go off to college. And since he's pretty smart, he's probably going to get into a really good college. And I was wondering about drawing from retirement savings to pay for college, or what method you guys might recommend.
Pat: We both have college students so we feel your pain.
Scott: And I was actually, two weeks ago, we were doing the little college tour ourselves with my third child.
Pat: How many kids do you have?
Steve: Just the one and we just got through the college tour as well. We went all the way up and down the West Coast and he's got his heart set on UCSD, so we're looking at that.
Pat: Okay, so what state do you live in?
Pat: Okay, and he's looking at a California school, which is good for you.
Steve: I'm hoping.
Pat: Yeah, we encourage that strongly.
Scott: Or one with a scholarship.
Pat: Yes, yes. Encourage that strongly. And apply for scholarships obviously at both the state and private schools as well. What's he studying? Do you know?
Pat: Oh, good. And tell us about yourself. You mentioned that using some of your...how would you pay for it? Out of pocket? Or use 401k's or IRAs or something like that?
Steve: Well, here's the deal. I mean, obviously, I don't want to pull from retirement savings. But if I had to, I wanted to know where would I have the least problem doing it. I have the Thrift Savings Plan, but I also have a separate set of 401k plans set up between my wife and myself.
Pat: How old are you?
Steve: I’m 47.
Steve: Actually, scratch that, 57, sorry.
Pat: Oh, you're 57.
Pat: That actually makes it much easier for us.
Scott: Are you working or retired?
Steve: I'm working.
Pat: And how much money do you have approximately in these plans?
Steve: About $500,000.
Pat: Okay. You said the word "Thrift Savings Plan," I assume you work for the federal government or the state?
Steve: No, federal government.
Pat: So you'll receive a pension. How long have you been with the federal government?
Steve: It's just over 15 years.
Pat: Okay. And your house is close to paid-for?
Steve: Actually, I just refinanced it for 15 years on the balance of what I owed.
Pat: Okay. So here's what I think. And Scott can weigh in...
Scott: When you retire, how much of your income will be replaced by a pension?
Steve: Probably 80 percent.
Pat: Wow. So here's what I would do.
Pat: Because you're only 57, there are penalties to get at those dollars.
Scott: Do you have money in an IRA?
Steve: Yes, we do with a separate advisor.
Scott: You can access the money for an IRA and use it to pay for educational expenses, college expenses, and avoid a 10 percent federal withdrawal penalty.
Pat: My point is, I would take as many loans as I could, and this is why.
Steve: As many loans as you could?
Pat: Yes, this is why. You have no idea where your son's going to end up, right? And if you go through and read the loan forgiveness...
Scott: The student loans, the federal student loans.
Pat: The federal student loans, if he qualifies for those and he becomes a teacher, forgiven. If he becomes a teacher, goes into the medical field, possibly forgiven. So, it's just a way to kick the can for a few years.
Pat: That's my view of it. Scott?
Scott: I would agree, actually. I would agree only because, whether you like it or not...There are certain things in our economic landscape, our political landscape that I don't like. But the fact is, I say well here's how the games played. What are the rules of the game? How is the game being played? So, what I look at right now, there's $1.2 trillion in student debt out there. Obviously a lot of these young adults are going to have...simply a lot of them are not going to be able to repay the debt.
Pat: There's a good chance that the government comes back by and does just like they did in the mortgage industry...
Scott: I started to talk on that.
Pat: ...and reduces them. So, why not just borrow the money and wait it out? You've got the assets that if you need...
Scott: Interest rates are almost nothing on the federal loans.
Pat: Yeah, you've got the assets. If you need to, you go back and you take the money out of the Thrift Savings Plan or the IRA at some point in the future.
Scott: You don't want to touch the Thrift or the 401k until you're fifty-nine and a half.
Pat: Correct. In the future...
Scott: Because you pay penalties.
Pat: Yeah, but you won't pay it after age fifty-nine and a half. So I wouldn't get reckless with it, but I'd borrow as much money as they'd lend me to pay for education.
Scott: On the federal student loans.
Pat: On the federal student loans. And when he gets there, just say, "Why don't you go teach in a low-income school, son, and help us pay this off, or enter the medical field, or...." Who knows what they are. But all I know is that...
Scott: There are many programs today. You go work for the government, after 10 years, your debt is forgiven.
Pat: Yeah. He goes down to Lawrence Livermore as a physicist or...
Scott: And your payments limited to how much income you've got.
Pat: Your income. And after 20 years or 30 years...
Scott: Twenty years.
Pat: Twenty years, they forgive it.
Scott: Every year it keeps getting better.
Pat: So, if you would've called me four or five years ago, I probably wouldn't answer the same way. But this environment says, "Borrow as much money as you can for a student loan." And I know there are other talk show hosts out there that say that. I think that they're ignoring the political landscape in which we live.
Scott: The interest rate is so low on them right now. And the taxes you'll pay, because you're still earning a high income, you're going to pay high taxes on your withdrawals.
Pat: So, I would...
Scott: That's what we would both do.
Pat: So appreciate the call. Thanks for calling.
Steve: Well thanks, you guys.