In 2010, student loan debt in America surpassed credit card debt, home equity debt and auto loans. By the end of 2015, outstanding student loan balances totaled $1.23 trillion. Knowing these statistics, how does a working adult make the decision to go back to school?
Like nearly everything in finance, there are a number of factors that will affect your decision. You need to consider if you’ll be reducing your income by choosing to work part time or quit your job altogether while pursuing your education and where you’ll make up for that shortfall in your household budget. Of course, if you are reducing your income, that may also mean you will be reducing your retirement savings if your 401(k) contributions are based on a percentage of your salary. You will also have to consider the cost of tuition and where that money is coming from. If you’re borrowing, you should also consider the interest rate of the loan.
Once you have considered the real cost of your decision, then you’ll need to determine what you can expect to earn with your new degree and how many years it may take you to recoup the cost of your additional education. Your goal is to find a combination of education costs and salary increases where the breakeven occurs in five to 10 years; however, you also need to consider what may work best for you and your family’s financial situation.
Carefully considering the degree you want to obtain and the career path you want to pursue should be able to help you determine your breakeven point with more accuracy. If you are looking to advance in your current profession, you should see if your college will allow you to test out of introductory courses by taking Prior Learning Assessment exams. You may be able to earn college credit for the knowledge you acquired from your work experience, professional training or military experience.
Once you have a plan for your further education and career, often the next hurdle is how to pay for your education. If you are looking to advance in your current profession, you should consider talking to your employer about tuition assistance. Generally, your retirement savings is not the best place to look. While you can borrow from your retirement accounts, there is an opportunity cost in doing so. The concept “You can borrow money for college costs but you cannot borrow money for retirement,” applies regardless of whether you are paying for your own or your child’s education.
If you borrow from your 401(k), you have to pay yourself back with interest with after-tax dollars. Should you leave your job, any loans against your 401(k) generally must be repaid within 60 days, otherwise the loan is considered a distribution, which may be subject to a 10% early withdrawal penalty in addition to income tax. If you withdraw money from an IRA, you can avoid an early withdrawal penalty if it is used for qualified education expenses, but you can never put the money back, as IRAs only accept contributions.
If you are considering returning to school as an adult, running the numbers and making conservative estimates may help you avoid financial stress down the road. If you have questions on how returning to school will affect your overall financial plan, the experts at Henssler Financial will be glad to help: