Pay off loan with MESP 529?

Question

I made a bad decision and took a 401k loan last year. I question whether I could pay off the loan with a 529 account I have through Michigan education savings plan. I would not be pulling any money that had gains. For instance, if I had 50k in my child's MESP plan, I would only be pulling 10k out of this account to help pay off my 401k loan. Once I paid off my loan, I would work hard to reimburse that education account till it was back to 50k (and more).

Can I do this? I didn't save enough in my emergency account (I have around 10k in savings) and I don't want to rely on family or anyone to ask for a loan.

I know I really messed up and please do not lecture me on what I did wrong. I know this was all bad financial decisions and I am working to make this better. Can I pull from a 529 education plan to help pay off my 401k loan?

If I cannot, what other options do I have? Do I have to take out a loan from a bank? If so, what kind of loan would I take out? Would I need to tell the bank that it is for paying off my 401k loan?

My oldest child is only 10. I have two other children at 3 and 4. I hope that they will be attending school locally here in michigan. Possibly starting at a community college or simply a state university within our state of Michigan.

Answer 1

How old is your child?

If the child is still a few years off from going to college this seems like a great solution to your issue. The only issue, really is if they are currently in college and 40K is expected to not last until you can come up with the additional 10K, however, the way you ask the question that does not seem to be the case.

I would talk to the plan administrator and decide if this is a good idea or not. Some verbiage indicates that there might be fees, and if they are high, that may make this a poor idea. Also if you can only withdraw the gains, that might make it a bad deal too depending on your income this year. However, I doubt that.

One thing that many parents do not realize (and financial authors or advisers do not help) is that you do not need the entire cost of college saved prior to your child beginning. You only need one semester. Community college can be cash flowed for about the size of a car payment and University for about double that.

So even if your child was beginning school next semester and you knew it would cost 50K for them to complete school. Could you save up 10K in three year or about 280 per month? Yep.

The only caveat I would add to these "magic pill" type solutions is often people do not learn the necessary lessons. For example those that choose to refinance their debt often end up in a worst situation in a few years despite it being such a good idea. They would have been far better off working to pay off their debt at a higher interest rate. However, from this and your previous post I think you have learned your lesson. That is worth something.

Go forth and do great things.