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Paying for College at the Last Minute

In Part 1 we discussed some of the ways you can pay for college even at the last minute. Here are some of the common ways that people use to pay for the ol' sheepskin that you might want to avoid.

1. Student loans -- the dark side. Student loans are not scholarships, they are loans, and paying them back is not going to be fun. The blithe attitude that says "I'll be making so much money when I graduate that I won't even notice the payment" is going to feel really lame when you realize how many toys you can't buy with your new salary because you have to pay off those student loans.

Bottom line: Use them if you have to, but borrow as little as you possibly can. (See Part 1 for alternatives.)

2. IRA withdrawals. It's true that the IRA regulations say that withdrawals from an IRA can be used for educational expenses, but that doesn't make it a good idea. You still have to pay taxes on those withdrawals -- even withdrawals of earnings from a Roth will be taxed at the account owner's highest tax rate. The only "advantage" the law gives you is that you don't have to pay the 10% penalty if the withdrawals are used for higher-education expenses.

However, with a Roth you can withdraw any contributions you have made without paying taxes (the money was taxed before you deposited it) or penalties. Withdrawing contributions from a Roth isn't terrible, but once you take the money out, you can't put it back (unless you return it within 60 days). Taking money out of an IRA means you are giving away all the money that your withdrawal could be earning years into the future. Take out $10,000 now, and in 20 years your IRA could be worth $80,000 less (assuming 11% annual growth).

3. 401(k) loans. Parents who have substantial 401(k) accounts that offer loan provisions might be considering this option. It's a better deal than taking the money out of the 401(k), and more attractive than the IRA options -- but it's not perfect, either. With a 401(k) loan, you are allowed to return the money, but while it's out, the money you borrowed will only earn the interest that you pay on the loan, which is usually far less than the rest of your account is earning in the market. Also, this can be a very costly option if the loan is not paid back fairly quickly.

4. Credit cards. I listed this one last because credit cards are just about the worst way to finance a college education. You're here, reading The Motley Fool. That's a good start. If you never come back, if you never invest a penny in stocks, never so much as put a dollar in a bank savings account, you will have justified our existence if you graduate from college with zero credit card debt.

You know that "Wow, I'm all grown up" feeling you get from having your own credit card? It's sucker bait. If you need plastic, get a debit card.

If there were no better way to pay for it, a college education would be worth even these bad choices. Not only does it double your lifetime earnings, college can (if you let it) teach you to think critically, introduce you to lifelong friends, humble you and boost your self-esteem, and, best of all, give you choices about how you will live your life.

Ann Coleman admits to a few bad choices when she financed her last campus sojourn. It's been six years and she's still paying off a student loan. The only worse choice would have been not going back at all. Stocks that she owns now are listed in her personal profile. The Motley Fool is investors writing for investors.

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