It’s exciting to enter graduate school and return to college life again. But my first concern upon getting my acceptance letter was: Great, now how will I pay for it?
As an adult returning student, I have more options than I did as a teenager for paying for college — even though I’m leaving my full-time job. Below, I detail five methods I’m focusing on to make my finances work. I’ve followed those up with five more ways to pay for college as an adult returning student.
[August 2015 update: I take stock of how well I’ve been balancing income and expenses. TL;DR: I need to do more work.]
1. Scholarships, assistantships and grants from the school.
A big part of my decision was fueled by the partial scholarship and graduate assistantship that I was awarded by my department. These are conditional on me pursuing my degree full-time.
Some friends who already entered academia told me that if a university department wouldn’t pay at least part of my way, I shouldn’t even consider going there for my master’s degree. I want to be seen as a serious and worthy student.
The trade-off is that I won’t be able to take advantage of my employer’s tuition assistance program. For me, it didn’t make sense to commit to staying at my job for a set period of time.
I’m pursuing scholarships outside of my university as well, such as one from a women-centered group, P.E.O International. But these are harder to get, and I’m not counting on them to pay a significant share of my expenses. (Though as students such as Indianapolis resident Shay Spivey have shown, it can be done.)
2. Tapping my 401(k) and IRA retirement accounts.
Usually, you can’t take out money from your tax-privileged retirement accounts before age 59 1/2 without incurring a 10 percent penalty for early withdrawal. However, the IRS will allow you to withdraw funds to pay “qualified higher education expenses.” These include tuition, fees, books, transportation, room and board as estimated in the university’s cost of attendance.
My employer’s 401(k) plan is one that allows what’s called a “hardship withdrawal” for reasons that include such IRS-qualified college costs, though the withdrawal must be approved and is subject to penalties. The plan also allows loans of up to 50 percent of an employee’s contributions, at a competitive interest rate. This is an attractive alternative because you can replace the money that would otherwise be lost through withdrawal. Such loans may strain a person’s cash flow, however, because they require immediate biweekly repayments through paycheck deductions. Those repayment amounts can be quite high since the loan can only be amortized over a maximum of five years (60 months).
However, since I’m leaving my job to return to school, I will not have the option of taking a 401(k) loan. Instead, I’ll roll over my 401(k) balance to a traditional IRA account, from which I’m allowed to make withdrawals that aren’t subject to the 10 percent penalty in order to pay the IRS-qualified higher education expenses (often abbreviated as QHEE).
As a backup, I also have a balance in a Roth IRA account, from which I am always allowed to withdraw my after-tax contributions without penalty for any reason.
I am wary of depleting my retirement accounts’ core capital. Taking a page from the recommended strategy for early retirement, I will aim to withdraw no more than 4 percent of the combined balances in any one year.
3. Tapping my Indiana 529 college savings plan.
Did you know you can set up a 529 college savings plan for yourself, not just for a child? A friend who is pursuing her master’s turned me on to this. While the contributions themselves are not tax-advantaged, your investments grow tax-deferred similarly to those in a 401(k) or traditional IRA. And the contribution limits are much higher, with no income or age restrictions. Withdrawals to pay for qualified college costs are free from federal tax.
Indiana offers a particularly sweet deal for taxpayers: A 20 percent tax credit (even better than a deduction) for contributions of up to $5,000 made each year to a qualified 529 plan. In 2014, I made sure to hit that target.
4. Maximizing my income-tax advantages.
It’s scary to transition from a decent income in 2014 to a nearly nonexistent one in 2015. But, this also presents some opportunities to limit my taxes and get a refund that may help pay my living expenses.
Among the moves I’ve made this year:
- Putting away the full $5,500 allowed in a traditional IRA to reduce my 2014 taxable income.
- Sending a sizable contribution to my 401(k) plan, which also reduces my 2014 taxable income. I have always contributed enough to capture the full match from my employer.
- Funding my Indiana 529 account by at least $5,000 in order to capture the maximum $1,000 state tax credit for 2014.
- Prepaying my Spring 2015 tuition and fees during this calendar year. I can add this amount (more than $3,400) to my mortgage interest and other itemized deductions on my 2014 income tax return.
When I file my 2015 income tax return, I’ll again be able to deduct any tuition and fees paid during that calendar year. But I may choose instead to utilize the American Opportunity Credit or the Lifetime Learning Credit.
I also anticipate I’ll be making a lot less income in 2015 — so much less, in fact, that I should be under the $29,000 limit in order to take advantage of the maximum subsidy for health insurance premiums at HealthCare.gov.
At the same time, I want to keep saving a percentage of my income, however meager. For instance, I’ll want to earn enough to be allowed to max out my IRA contribution for the year. In fact, I may consider using my lower tax bracket of 15 percent to execute a partial Roth conversion, which doesn’t go toward paying for college but will help boost my retirement income in the long run.
5. Drawing down my home equity line of credit.
It’s nice to have financial assets such as my home’s appreciation to borrow against. The interest rate on my HELOC is less than the 6.21 percent rate being quoted for the 2014-15 school year for federal direct unsubsidized college loans to graduate or professional students, and it will be paid off in full when I eventually sell my home. The drawback? Unlike with student loans, I have to make payments on this loan while I’m still in school, on top of payments on my primary mortgage and other monthly living expenses.
The above five strategies are the primary methods by which I’m paying for college as an adult student returning to college for a graduate degree. But like many younger college students, I’m also pursuing several other methods to meet my bills, too.
6. Taking out a student loan.
Just for insurance, I filed a Free Application for Federal Student Aid (FAFSA) and got qualified for a direct unsubsidized student loan. I decided to accept it; I don’t want to be caught short as I adjust to living on a college student’s budget again. I may pay off the loan interest or even the entire balance early if it turns out I am able to swing my expenses without it.
7. Working part-time.
I’ll be employed by my department at least 5 hours a week as a graduate assistant. I’m looking forward to this primarily for the experience of teaching or helping with research. But any money I make will be nice, too. I also plan to pick up some contract or part-time work to supplement my income, as long as it doesn’t endanger my health insurance subsidy or complicate other financial planning.
8. (Gulp) Taking advantage of credit-card offers.
Right now, I have excellent credit. I’ve also been paying down my HELOC in case I need to draw down that credit line in graduate school, and other banks have taken notice. As a consequence, I’m getting hit up with a lot of offers to open credit cards with 0 percent interest for limited periods and for 0 percent balance transfers. One of these was so attractive that I signed up. But I scheduled a date in my personal finance software to pay it off before the introductory offer expires.
9. Cutting my expenses (more).
No more cable (I’d cut that a while ago, actually). Forget eating out every day. No buying coffee or new clothes on a whim. Walking to class or the grocery store instead of driving. Taking the bus rather than paying parking fees at the airport. Scheduling free activities. It’ll be a tough change from my employed life, but they’re just some of the ways I’m hoping to keep my personal spending to $600 a month. Plus some will help with the next item …
10. Getting healthier.
I want to be fully engaged in my graduate career. That means I can’t afford to be too sick to attend classes or do research or homework. And long-term, I want to head off developing high blood pressure, diabetes or other ailments that tend to manifest in middle age. I’ve taken several steps already to improve my health. For one, I’m taking care of long-delayed dental work. My doctor pointed out that infections in my teeth or gums can contribute to overall health problems. I’ve also embarked on a low-carb diet in order to lose weight. These moves have actually added expenses in 2014, but I hope to be able to keep spending in 2015 for dental work and more meat and fresh vegetables through smart shopping and budgeting. Another of my wellness strategies is one that drops straight to my bottom line: leaving my car at home. As I walk to class or use my bike to run errands, I’ll be saving gas and wear-and-tear on my car while keeping my body physically fit.
As you can tell, I’ve thought out how to pay for college quite a bit. Now comes the hard part: living it. I’ll keep updating my blog as I’m able with how well my income and spending realities track with these financial preparedness strategies. Let’s see how I do!