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My husband and I both have a 401(k) and we were thinking about borrowing from one of these accounts to prepay for our son’s education, who is 14. Do you think that would be a good investment considering the rising cost of education?–P. Smith and F. Smith, Chester, VA
Barring an emergency, borrowing from your 401(k), for any reason, should be your last resort. It’s one of the most common mistakes that people make when managing their 401(k). While the relatively low interest rate may make the loans seem attractive, it only serves to reduce the balance that would have been available at retirement.
But to the matter at hand: I imagine you’re looking at your 14-year-old son and thinking that time’s running out. Even though you’re starting late, you’re asking the right questions. Another common mistake parents make is to panic and try to shift funds around or seek to make a killing in high-risk investments with the hope of a quick payoff.
Because you’ll need to tap into whatever savings you accumulate in three or four years, you should be conservative. That means you’ll want to look for high-yield money-market funds, plus treasury notes, CDs, and bonds.
And remember, though tuition is going up, there are a wide range of financial aid programs, grants, and work-study opportunities that you can tap into. So continue to ask the right questions about savings and financial aid, and you’ll be able to develop a plan that can move you forward, not set you back.