A 401(k) is an employer-sponsored retirement plan. Under section 401(k) of the Internal Revenue Code, the federal government created special tax advantages for contributions to and earnings generated from these plans.

Parents contemplating borrowing from their 401(k) to cover education costs should consider the following:

• Interest rate. Fixed-interest loan set at the prime rate and, generally, a margin of plus 1 to 2 percentage points.
• Fees. Vary, depending on terms of lender.
• Credit eligibility. Not required.
• Tax considerations. Double taxation: 1. after-tax dollars are used to pay back the principal and interest on your loan; and 2. those dollars taxed again when withdrawn at retirement.
• Borrowing amount. Borrowing is usually limited to 50% of your vested balance, but not more than $50,000.
• Borrowing for all your children. The borrowing limit of $50,000 may not be enough to cover every child for all their years of college.
• Borrowing for school-related expenses. Can finance expenses in excess of cost of attendance, such as a commuting vehicle, travel home, furniture, and appliances.
• Deferment and forbearance clauses. None.
• Repayment. Starts as soon as borrowed funds are disbursed, and the loan must be repaid within 5 years. You cannot postpone payment until your child graduates.
• Repayment plan options. None.
• Liquidity, emergencies, and other expenses. Once you borrow the maximum allowable 401(k) funds, you cannot borrow against your account.
• Lost retirement income and interest. Repaying the loan while maintaining your current level of contribution may not be possible.
• Job change/job loss. If you leave your job, you may be required to repay the loan within 60 days of departure. Otherwise, your employer will consider the unpaid loan a withdrawal subject to income tax, plus a 10% penalty if you’re under age 59½ and not retired. For more information, contact your financial adviser.

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