The cost of college education, including room and board, can present a formidable financial burden for the student and his family.  There is no question that undergraduate and graduate degrees increase the earning capacity of the graduate, yet paying for the credentials can often be more difficult than the student's actual course of study.  There are several alternatives for paying the tab.  Some options are only available to moderate and lower income families, while other options are available to everyone.  Consider the following ideas when planning to finance a college education:

How Much Money Will You Need & How To Save It

• Project the future cost of education with the assistance of your financial planner.  Given a five percent rate of inflation, the current cost of college education will double approximately every 14 years. 

Maria, age 13, wants to go to a private four year college when she reaches age 18.  Annual room, board and tuition is $ 50,000 a year in today's dollars.  Assuming these costs increase at 8 percent a year throughout her senior year of college, and assuming her parents can earn 4 percent after-tax on her college education fund, the amount needed when she reaches age 18 to pay for all fours years is $ 280,000

• Establish a monthly savings plan for the accumulation of the targeted amount.
  
  
• Consider establishing an Education IRA for each of your children.  You can make nondeductible contributions up to $ 11,000, per spouse (equal to the gift tax exclusion) , a year to each child's Education IRA.  Contributions, except for rollover contributions, after your child turns age 18 cannot be accepted. The annual contribution of $500 per IRA is phased out if your  Modified Adjusted Gross Income is between $95,000 and $110,000 and you are single, and  between $150,000 and $160,000 if you are married and file a joint tax return.

Income earned within the account is tax-free.  Distributions are tax-free to the extent they are used for the payment of your child's qualifying higher education expenses. Higher education expenses must be reduced first by any tax-free scholarship, educational assistance allowance, or any other payment of college expenses (other than gifts or inheritances) that is not taxable. To the extent that annual distributions exceed the education expenses, a portion of the distribution will be taxable and will also be subject to a 10% penalty.  Distributions on account of the death or disability of an IRA beneficiary are not subject to the 10% penalty.  An Education IRA can be rolled over tax-free to another Education IRA for the same child or to an Education IRA of another eligible family member. When the Education IRA beneficiary reaches age 30, the entire balance of the account must be distributed to the beneficiary within 30 days.  The amount distributed will be subject to income tax and the 10% penalty.  Upon the death of an Education IRA beneficiary, the account must be distributed to the beneficiary's estate within 30 days. IRC 530 

• Consider a lump-sum or periodic payments to a Qualified State Tuition Program (QSTP).   Funds saved through QSTP may only be used for the qualified higher education expenses of a beneficiary.  These expenses are tuition, fees, books, supplies, equipment, and reasonable room and board expenses of a student who is enrolled at least half-time, required for enrollment or attendance of a beneficiary at an eligible educational institution.  Income in the QSTP account is not taxed until withdrawn and then it is taxed to the beneficiary (student) who is usually in a lower income tax bracket than the person saving to the account.  Earnings not used for qualified higher education expenses are subject to a penalty tax of 10% in addition to regular income tax.  Funds saved in a QSTP are considered gifts that qualify for the annual exclusion for gift tax purposes.  A special rule enables a person to save five times the annual exclusion in one year with such gift being treated as having been made pro-rate over five years.  Although the funds are considered gifted for transfer tax purposes, they are still under the control of the donor and may be returned to the donor but there will be a penalty on earnings.  The funds may also be transferred to another member of the donor's family without tax or penalty.  IRC 529
  
  
• Consider a Tuition Prepayment Plan at the university of your choice and pay for all four years of education at the freshman rate.  This technique is used as a hedge against rising tuition. 
  
  
• Consider saving for a college education for your children by using some of the techniques found under TAX PLANNING: Ways to Shift Income to Family Members in Lower Tax Brackets.  However, if there is a good possibility that your child may qualify for financial aid, these strategies may be inappropriate.  See Applying For Financial Aid.
  
  
• Consider purchasing investments for your child's college education within a account set up under the Uniform Gift to Minors Act or the Uniform Transfer to Minors Act to take advantage of your child's standard deduction and lower tax bracket if your child is 14 or older.  However, this strategy may back fire if you will be seeking financial aid.  Assets owned by college students reduce the amount of financial aid available to a greater extent than if the assets were owned by the parents.
  
  
• Consider purchasing growth oriented mutual funds in the name of your child.  This can be accomplished with a lump-sum purchase or through monthly or other periodic purchases that take advantage of dollar-cost- averaging.
  
  
• Consider investing for your child's college education by establishing a diversified portfolio of stocks and bonds.  As your child approaches college, gradually shift out of stocks to short-term bonds to ensure that needed cash will be available when tuition and other costs are due.  An alternative to investing in interest paying bonds is to buy zero coupon treasury bonds or zero coupon municipal bonds.  Zeroes can be purchased at a deep discount years before college starts, and will mature at their full face value.  They can be purchased to mature when college costs are scheduled to be due. 
  
  
• Consider the purchase of U.S. Series EE or I savings bonds to help fund the cost of college education.  Interest earned on U.S. Series EE savings bonds purchased after December 31, 1989 and Series I bonds, that are redeemed for the payment of college education for your spouse, your children, or yourself, is tax-free. IRC 135 and Publication 17

For 2001, the tax-free status is phased out on Adjusted Gross Income from  $83,650 up to $113,650 and you file a joint tax return, and from $55,750 up to $70,750 for all other filers.  Series EE  and I bonds redeemed for college education must be reported on IRS Form 8815. 

• EE and I bond interest and principal must be used for tuition and fees.  Costs of rent and food are not included.
  
  
• Qualifying education expenses used to compute the exclusion of EE and I bond interest must first be reduced by any education expenses taken into consideration  when computing the Hope Scholarship Credit or the Lifetime Learning Credit. IRC 135(d)(2)
  
  
• EE and I bonds purchased for your child under the Uniform Gift to Minors Act will not qualify.  Likewise, bonds purchased by grandparents will not qualify unless the grandchild is their dependent.
  
  
• Bonds must be purchased by an individual who has attained age 24 before the date of issuance.
  
  
• To obtain additional information on Savings Bonds write:  Office of Public Affairs, U.S. Savings Bonds Division, Washington, D.C. 20226.  Request Publications SBD-1964.
  
  
• If your income is too high to qualify for the tax-free income from Series EE and I bonds, consider purchasing Baccalaureate Bonds.  So called Baccalaureate Bonds are tax-exempt zero coupon municipal bonds that are generally non-callable, with very attractive yields, and with maturities from one to 30 years.  Some states redeem the bonds at an amount above their face value if the proceeds are used to pay in-state college tuition. 
  
  
• Consider other sources of funding such as future inheritances, gifts, and assistance from extended family members.

Applying For Financial Aid

• College financial aid (grants, loans and work opportunities) is given based on the completion of the Free Application for Federal Student Aid.  To request the application call 800-433-3243, or download the application from the site given here.   If you applied for federal student aid for the 2001/2002 school year, you probably will be able to file a 2008/2009 Renewal Free Application for Federal Student Aid which is less time consuming to complete. Your 2008/2009 school year financial aid application must be received by July 1, 2010. The main purpose of this application form is to determine the net worth and income for you and your child, and how much you will have to contribute annually towards the cost of your child's education.  To gain a thorough understanding of how much you and your child must contribute towards the cost of college education, request the booklet Expected Family Contribution by calling 800-433-3243. The income you may have to contribute is based on the following factors: (1) Your prior year's Adjusted Gross Income plus certain nontaxable income such as Social Security, child support, IRA and 401(k) contributions, minus; (2) The prior year's U.S. Income tax, and allowances for state income tax, Social Security Tax, employment expenses, and future retirement income needs.

Parents must contribute from 22% to 47% of their net income, while dependent children are required to contribute a hefty 50% of theirs.  In addition, parents generally must contribute 12% of their net worth and dependent children must contribute 35% of theirs. You can reduce your expected family contribution by reducing your reported income and net worth during the years you are required to submit financial aid applications by using the following strategies:

• Reposition investments that generate taxable interest and dividends into tax-deferred annuities, cash value life insurance, and other tax-free and tax-deferred investments.  However, interest from tax-exempt municipal bonds must be counted. 
  
  
• Don't sell investments that will generate capital gains.
  
  
• Sell investments that result in a capital loss.  Losses in excess of gains may not exceed $3,000 in any given year.
  
  
• If you work for a company, request that you receive more fringe benefits instead of cash compensation. Request that some of your compensation be deferred to future years.
  
  
• If you are a business owner, consider reducing your salary and increasing contributions to corporate retirement plans.  However, contributions to IRA's, 401(k) plans and Self-employed Pension and Profit Sharing Plans must be added back to your income.  (See Business Deductions for a listing of ways you can reduce your taxable business income.
  
  
• Use the strategies for deferring income and accelerating deductions found in Tax Planning: Common Year-end Tax Planning Moves.
  
  
• Use cash in the bank and other investments to buy or make improvements to your home or to purchase personal property such as clothing, a new car, jewelry, etc.  Your home and personal property are not required to be shown on the financial aid application. You may even want to prepay a family vacation.
  
  
• Business and farming assets including land, buildings, machinery, equipment, inventories, livestock, etc, valued at less than $400,000 are eligible for a reduction allowance of 40% to 60% depending on their total value less related debts.  As a result, consider using fully countable assets such as cash and other liquid investments to buy needed supplies, inventories, and equipment.  Also consider taking out loans secured by business assets to purchase personal assets such as a car.  Do not include the value of any building you use as a personal residence.
  
  
• Given today's real estate be careful not to overvalue your investment real estate.
  
  
• Consider using cash and other investments to pay off loans such as credit card, auto loans, and other personal loans that aren't deductible on your financial aid form.
  
  
• Because net worth contribution rates are stiffer for your child, think twice about shifting assets to your child prior to college in order to save on income taxes.
  
  
• To reduce your child's net worth consider asking your child to spend down his bank accounts on things you might buy for him anyway.  These expenditures might include a car, clothing, airline tickets, etc.
  
  
• Your child may be able to apply for financial aid independent of you if your child is one of the following: (1) Born before January 1, 1978 (2) a U.S. veteran, (3) a graduate or professional student, (4) a married student, (5) a ward of the court or both parents are dead, or (5)a person who has legal dependents other than a spouse,
  
  
• Your financial aid administrator can adjust your reportable income for the following special circumstances: (1) medical expenses, (2) tuition expenses at elementary or secondary schools, (3) current unemployment, and (4) other extraordinary situations.  Be sure to bring these special circumstances to the attention of the officer.  In addition, if your situation warrants, the administrator can change the status of your child from dependent to independent.
  
  
• File your financial aid form as soon after January 1 as possible.  Aid is available on a first-come, first-serve basis.  If you are not positive what your previous year's income figures are, you can make estimates and make corrections, if necessary, later.
  
  
• If your child is accepted by two or more colleges, play the colleges against each other to maximize the aid you can receive.

Apply for State Student Assistance. 

Early applicants often have a greater probability of receiving assistance since many state programs have limited funds that are distributed on a first-come first-serve basis.  Find out when the funds will be made available and make timely application.

Apply for direct aid from the college.  The aid can take the form of a tuition payment plan, a student loan, academic and athletic scholarships, and discounts for more than one student from your family. In many cases, expensive colleges are a better source of financial aid.

Have your child apply for direct aid and scholarships during a spring or summer term when the demand for financial aid is lower.

Grants

Apply for a Federal Pell Grant. The maximum grant is $3,300 a year and the grant does not have to be paid back. 

Eligibility for the grant is based on a financial needs formula.  The amount of the grant depends on your financial needs score, the cost of education at your child's school, whether your child is a full-time or a part-time student, and whether your child attends school for a full academic year or less.   Your 2001/2002 school year financial aid application must be received by July 1, 2002.

Apply for a Federal Supplemental Educational Opportunity Grant (FSEOG).  A  grant of between $100 to $4,000 a year is available to your undergraduate child who has an exceptional financial need as determined by the school.  How much aid your child will receive depends on financial need, the amount of other aid your child will receive, and the availability of funds at the school.  Unlike the Federal Pell Grant program, which provides funds to every eligible student, each school participating in a campus-based program receives a certain amount of funds.  When that money is gone, there are no more awards for that year.

Work study and The National Service Trust

Have your child apply for a subsidized job through the College Work Study (CWS) program.  Under this program your child can earn at least the minimum wage.

Students hired through the Financial Aid Office who carry at least 12  credit hours and who work for 20 hours or less per week may not be subject to FICA tax .  In addition, if the student did not have any income tax liability for the previous year and doesn't expect to have any tax liability for the current year, he or she can avoid income tax withholding by entering the word "EXEMPT" on form W-4 If the student has investment income and can be claimed as your dependent, he or she should not claim exempt status if the total investment income and wages will exceed $750 in 2001.
Letter Ruling (TAM) 9332005

Have your child consider working in community service for up to two years through the  National Service Trust. The National Service Trust provides $4,725 a year for up to two years of community service in one of four priority areas: education, human services, the environment, and public safety.  Your child must complete 1,700 hours of service work a year.  Your child  can work before or after going to college, graduate school , or trade school, and the funds can be used to either pay current educational expenses or to repay federal student loans.  Your child will  receive a living allowance of at least $7,400 a year and,  if necessary, health care and child care allowances.   For more information call AmeriCorps at 800-942-2677.

Scholarships

Have your child consider making a commitment of four years to active military duty in exchange for a scholarship that pays all tuition, fees, books, and provides a monthly stipend.  The Army, Navy, Air Force, and Marine Reserve Officers Training Corps offer scholarships.

The National Guard offers up to $252 a month for 36 months in full-time tuition after completion of basic training and technical school under the Reserve GI Bill.  A six year commitment to active duty and a two year commitment to inactive duty is required.  (800-432-1810)

The National Guard also offers Federal Tuition Assistance up to 75% of tuition fees. Courses must be taken at an accredited college or university or at a community college and cannot exceed 15 credit hours per year. There is no time commitment, but requirements do include good standing in the National Guard.

Military recruits enlisting on or after October 1, 1998 are entitled to education funds under the Montgomery GI Bill as follows: two year enlistment: $15,444, three year and four year enlistment: $19,008.

The U.S. Army has it own college fund starting at $20,000 for a two year enlistment, $25,000 for a three-year enlistment, and up to $30,000 for a four year enlistment.  To qualify you must be a high school graduate, score a 50 or better on the ASVAB test, and enlist to work in certain qualifying jobs within the Army.

If your child is the child or spouse of a deceased veteran, he or she may be eligible for college education benefits.

Loans

Up to $2,500 of interest paid on higher education loans in 2001 and thereafter is deductible as an adjustment to Gross Income.  The interest is deductible for the first 60 months in which the payments are required.  The loans must be for the costs of higher education for you, your spouse, or your dependent.  The interest deduction is phased out if your Modified Adjusted Gross Income is between $40,000 and $55,000 and you are single, and between $60,000 and $75,000 if you are married and file a joint tax return.  In addition, if you claimed the interest on Schedule A under another section of the Internal Revenue Code, you can not claim the interest as an adjustment to income. IRC 221

Family Loans

Consider an interest-free loan to your child in the amount of $100,000 or less.

The loan should be invested for your child in order to ensure that no more than $1,000 of taxable income is earned annually (low dividend paying growth stocks for example.) If the income exceeds $1,000 all of it will be deemed to be taxable to you and deductible by your child as interest paid.   The investment should also have appreciation potential to ensure that the child will have enough money to pay for college, to purchase a house, or to achieve some other financial goal.  Publication 550, IRC 7872(d)

You make an interest free-loan of $50,000 to your 16 year old daughter to be invested for her college education.  You invest it on her behalf in growth stocks having a 2 percent dividend yield and projected growth rate of 7 percent a year.  The $1,000 of dividend income is taxable to your daughter. The $3,500 of appreciation is not taxed until the stocks are sold.  After your daughter has completed college she can repay the $50,000 loan according to the terms you establish in the promissory note.

Federal Perkins Loan

Apply for a low interest Federal Perkins Loan.  Eligibility is based on financial need, and your undergraduate child can borrow $4,000 for each year of undergraduate study with an overall undergraduate limit of $20,000.  Graduate students may borrow $8,000 each year.  The total outstanding loan as a graduate student including amounts borrowed as an undergraduate cannot exceed $40,000.  If your child is attending school at least half-time, repayment begins nine months after your child graduates, leaves college, or drops below half-time.   If your child is attending less than half-time the grace period may be different.  At the end of the grace period you must begin repaying your loan.  You may be allowed up to 10 years to repay.  The interest rate is 5% and the money is borrowed from the school.  Repayment can be postponed and even cancelled under certain conditions.

Federal Stafford Loans

Apply for a low interest rate Federal Stafford Loan.  Federal Stafford Loans are available through the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan (FFEL) Program.  The terms and conditions of a Direct Stafford or FFEL Stafford are similar.  The major differences between the two are the source of the loan funds, some aspects of the application process, and the available repayment plans.  Direct Stafford Loans are made directly to the student from the U.S. Government, whereas FFEL program Stafford loans are available through banks, credit unions, and other lenders. A Federal Stafford Loan is made to students attending school at least half-time.  There are two types of Federal Stafford Loans: The Subsidized Federal Stafford Loan and the Unsubsidized Federal Stafford Loan. Qualification for the subsidized loan is based on family income.  Family income is not considered in determining eligibility for the unsubsidized loan.  The amounts of both loans are based on the difference between the cost of college attendance less the amount of all estimated financial assistance.   Unsubsidized loans are subject to higher origination fees, higher insurance premiums to cover default, and other restrictions. 

If your child is a dependent undergraduate student, he or she can borrow up to: $2,625 the first year enrolled for a full academic year; $3,500 if the student has completed the first year of study and the remainder of the program is a full academic year; $5,500 a year if the student has completed two years of study and the remainder of the program is at least one academic year.

If your child is an independent undergraduate student, or a dependent student and you are unable to get a PLUS loan, your child can borrow up to: $6,625 the first year enrolled for a full academic year (at least $4,000 of this amount must be in unsubsidized Stafford Loans) ; $7,500 if the student has completed the first year of study and the remainder of the program is a full academic year (at least $4,000 of this amount must be in unsubsidized Stafford Loans); $10,500 a year if the student has completed two years of study and the remainder of the program is at least one academic year (at least $5,000 of this amount must be in unsubsidized Stafford Loans); $18,500 a year if your child is a graduate student (at least $10,000 of this amount must be in unsubsidized Stafford Loans.)  The total Federal Stafford Loan debt cannot exceed $23,000 for a dependent undergraduate and $46,000 for an independent undergraduate (no more than $23,000 of this amount may be subsidized loans). Graduates cannot have a loan balance that exceeds $138,500 ($65,500 in subsidized Stafford Loans and $73,000 in unsubsidized Stafford Loans) including amounts received as an undergraduate.  Different loan limits exist for loans taken out before October 1, 1992.
 
If your child has a subsidized loan, the government pays the interest while your child is in school or in deferment.  Payments do not commence until six months after leaving school or when attendance drops below half-time. The federal government will pay the interest on the loan until the repayment period begins.  Any payments made by the student while in school or during the six months after leaving school will reduce the principal balance of the amount owed. 

If you have unsubsidized loans, you'll be charged interest from the day the loan is disbursed until it is repaid in full, including in-school, grace, and deferment periods.  You may choose to pay the interest during these periods or it can be added to the loan balance.  During the grace period on an unsubsidized loan, you don't have to pay any principal, but interest will be charged.  You can either pay the interest or allow it to accumulate. 

Payments on both subsidized and unsubsidized loans can be deferred or even cancelled under special situations.  If you are temporarily unable to meet your repayment schedule, but are not eligible for a deferment, you may receive forbearance for a limited and specified period.  During forbearance, your payments are postponed or reduced.  Whether your loans are subsidized or unsubsidized , the government does not pay the interest; you are responsible for it.  If you don't pay the interest as it accrues, it will be added to your loan balance.

Interest rates are variable but will not exceed 8.25%.

To find out about Stafford Loans in your state call 1-(800)-4-FEDAID.

Parent Loans for Undergraduate Students (PLUS)

Apply for Parent Loans for Undergraduate Students known as a Federal PLUS Loan. For PLUS loans first disbursed on or after July 1, 1993, the annual loan limit is your child's cost of education minus any estimated financial aid received for the period of enrollment covered by the loan.  PLUS loans are make by financial institutions through the Federal Family Education Loan (FFEL) Program and directly  through the school's financial aid office via the Federal Direct Loan Program.  You do not have to prove financial need but you do have to have a good credit history.    Payments must begin 60 days after the last loan disbursement.  PLUS loans are eligible for deferment of principal payment only.  The interest rate charged on the PLUS loan is a variable rate based on the average rate of the one-year Treasury Bill over a 52 week period ending prior to June plus 3.10%.  The maximum rate that can be charged is 9%.  There is also a fee of up to 4% of the loan, deducted proportionately each time a loan payment is made.

Consolidation Loans

Consolidation loans allow a borrower to combine different types of federal student loans to simplify repayment.  (A borrower with just one loan can also choose to consolidate it.)  Both the Direct Loan Program and the FFEL Program offer consolidation loans. 

A Direct Consolidation Loan is designed to help student and parent borrowers simplify loan repayment.  Even though you might have several different students loans, you'll make only one payment a month for all the loans you consolidate.  You can even consolidate just one loan into a Direct Consolidation Loan, to get benefits such as flexible repayment options.  Most federal student loans and PLUS loans (including FFEL program loans) can be consolidated. 

An FFEL Consolidation Loan is available from participating lenders, such as banks, credit unions, and savings and loan associations.  Most federal student loans and FFEL PLUS loans can be consolidated.   Direct Student Loans may not be consolidated under an FFEL Consolidation Loan.  A participating lender can give you a complete listing of eligible loans, interest rates, and payment options.

If you know you are in default on a federally insured loan, call the Department of Education (800-433-3243).  Ask the counselor to refer you to the Credit Management and Debt Collection Services office handling your loan.  Counselors can provide you with copies of your loan agreements and payment records and help you set up a payment schedule.  They can also help you deal with collection agencies and help clear your credit report. 

If you have a campus-based loan (as opposed to a federal loan) you may be able to avoid repayment if you accept a community service type job either before you start college or after you graduate.

If you have exhausted other sources of funding and the pay-as-you-go  method is insufficient, consider taking out a deductible Home Equity Loan.

Other Strategies

If your child is having difficulty entering the college or university of his choice, consider encouraging him or her make application during a spring or summer term when the student population is typically lower. 

To reduce the cost of college education, consider having your child complete general education requirements at a local college or junior college.  Upon completion of the general education requirements, your child can then make application at the college or university of his or her choice and complete the undergraduate and/or graduate studies.

For more information on financial aid programs purchase the College Cost Book, published by the College Entrance Examination Board.  In addition, obtain a copy of The Student Guide published by the U.S. Department of Education.  This guide provides useful information on grants, loans, and work study programs.  To request The Student Guide call 800-4FEDAID.

To defray the cost of room and board consider purchasing a rental property where your child attends school.  In addition, you can hire your child to manage the property.  You may also claim the costs of travel expenses to inspect the property.  You may claim depreciation and other expenses on that portion of the property for which you charge a fair market rental amount.

You can withdraw money from your IRA to pay for college education.  The withdrawal will be subject to ordinary income tax.  If  you are under age 59½, you can avoid the 10% early withdrawal penalty if the withdrawal is used for qualified higher education expenses for either you, your spouse,  your child or grandchild.  Qualified education expenses are to be reduced by any tax-free scholarships, educational assistance allowances, or any other tax-free payments received during the year.  IRC 72(t)(2)(E) and IRC 72(t)(7)

If you or another family member routinely make gifts to your children as part of a strategy to reduce future estate taxes, consider making gifts in excess of  the annual $10,000 gift exclusion where the gift is used for college tuition and it is paid directly to the college by the donor.  IRC 2503(e)

Shop the best buys in college education by reading Barron's 300:  Best Buys in College Education.

BORROWING

Your ability to borrow money is a critical factor to your financial flexibility and success.  Consider the following ideas in establishing credit and borrowing money:

Establishing And Maintaining Good Credit

Establish a long-term relationship with a bank to facilitate borrowing.

Provide your banker with a copy of your financial statements annually.

Establish good credit by obtaining and repaying short-term bank loans on a timely basis.

Good credit is established by:

A long employment history with the same employer

Home ownership or several years of renting at the same location

A good payment history on charge accounts

The size of your bank and savings accounts at the institution where you are borrowing

Once you have established a good credit relationship with a bank, think twice about shifting your business to another bank in exchange for a small reduction in interest rates.  Good credit relationships are built over a period of years.

Review your Credit Bureau files annually and correct or dispute any discrepancies or errors.  You can request a free credit report if you are ever turned down for a loan because of information in the credit report.  In addition, you can request a free report once a year from EXPERIAN  (800-682-7654), or request one any time from Equifax (800-685-1111) for $8.00.

Improve poor credit ratings by obtaining a collateralized Master Card or Visa.  The card can be collateralized by a savings account.

Determine the percentage of your monthly income that is spent to make debt payments.  Your debt payments should not exceed 35 percent of your monthly gross income.

Retirement Plan Loans

Consider borrowing from your company's Profit Sharing, Stock Bonus, Pension, 401(k) or 403(b) plan.  IRC 72(p)(2)

The maximum loan cannot exceed the (1) lesser of $50,000 or one-half of your vested accrued benefit and (2) the greater of $10,000 or one-half of your vested accrued benefit.  For example, if your vested accrued benefit is $80,000, the maximum you can borrow is $40,000.  If your vested accrued benefit is $15,000, you can borrow a maximum of $10,000.  IRC 72 (p)(2)   Your particular plan provisions may be more restrictive.

  If your spouse is the beneficiary of your plan benefits, he or she must consent to the loan.  IRC 417(a)(4)

The loan must be repaid in five years unless the loan was used for the purchase of your home.  If you default on payments, the unpaid balance may be treated as a taxable distribution. Plan loans are repayable if you change jobs, quit, retire or get fired.  If you are unable to make full repayment the remaining balance is taxable income to you and would also be subject to the IRS ten percent early withdrawal penalty if you are under age 59½ at the time.  If you plan  on changing jobs during the repayment period, be sure you have other funds available to make complete repayment.  IRC 72(p)(2)(B)

If you are a shareholder-employee of an S corporation or an owner-employer you cannot borrow from your retirement plan.  A shareholder-employee is a person who owns more than 5% of the outstanding stock of the corporation.   In calculating whether the shareholder-employee owns more than 5% of the outstanding stock, the shareholder-employee must include the stock of his spouse, children, parents, and grandparents. Owner-employees must also include the ownership interest of brothers and sisters, and ancestors and descendents. IRC 4975(d). IRC 318(a)(1). IRC 401(c)(3) and IRC 267(c)(4)

If you are considered a key employee, borrow the money from a bank rather than your pension plan.  Key employees cannot deduct the interest paid on money borrowed from a pension plan regardless of the use of the funds.  IRC 72 (p)(3)

Interest you pay on loans against money you have contributed to your 401(k) or 403(b) plan will be credited to your account but will not be deductible.  However, an IRS letter ruling allowed deductibility of interest where the loan was secured by the principal resident of the borrower and not the 401(k) account.  IRC 72(p)(3)

Consider borrowing from your Self-employed Pension or Profit Sharing  retirement plan.

If you are an owner-employee, the loan would be considered a prohibited transaction and would be subject to an excise and income tax.  In addition, the transaction may completely disqualify the plan.  Consequently, you should consider an alternative source of borrowing.

Non-owner employees may borrow from the plan subject to certain restrictions.

For short term cash needs, consider the withdrawal of money from your IRA and then redeposit it within 60 days.  If you fail to redeposit (roll over) the money within 60 days, the withdrawal will be subject to income tax. In addition, the withdrawal will be subject to a 10 percent early withdrawal penalty if you are under age 59½.

Hardship Withdrawals From Retirement Plans

If your 401(k) or 403(b) plan does not permit borrowing, you may be able to withdraw your account balance if the money is needed for the following hardships: (1) deductible medical expenses, (2) purchase of a home, (3) payment of tuition for the next semester of post secondary education for you, your spouse, children, or dependent, (4) to prevent being evicted from your home, and (5) to avoid foreclosure on your home.

The money withdrawn will be subject to income tax. If you are under age 59½, it will also be subject to a 10 percent early withdrawal penalty unless the funds were used to pay for (or reimburse) the cost of deductible medical expenses. 

You can  withdraw money you have contributed to your account but not the money your employer has contributed or any income your account has earned.