My Comments: I’ve long stressed that the best way for a parent to pay for the college eduction of their children is to use someone else’s money. Especially if it doesn’t have to be paid back.

Virtually all commentary on this subject that is found in the journals and magazines sent to financial advisors like myself all talk about 529 Plans and getting Grandpa to set up a trust or making sure you start a savings account when the kid is three years old and putting aside that extra $500 per month that “just happens to be left over” at the end of every month. Yeah, right!

This was the editorial is a recent issue of InvestmentNews, a magazine that comes weekly. It’s written by the editor and was his editorial comment for the week.

By Jim Pavia

About eight months ago, a recently divorced friend called me in a panic. John and his ex-wife, Mary, as I’ll call them for the sake of privacy, were sorting out their financial affairs and realized that there was little money available to pay for college for their only child, who will be heading of to school in 2013.

John, who had never used a financial adviser, called to ask my advice about tapping his retirement fund to pay for his daughter’s education.

Mustering all my tact and being mindful of how John’s life had just been turned upside down by a divorce, a job change and finding a new place to live, I decided to go easy on him.

“That’s the dumbest, most idiotic idea I have ever heard in my life,”, I said gently.

After a few more supportive words between old friends, I suggested he consult a financial professional to get a more informed opinion. He was hesitant, but I assured him that seeking professional help was the best way to go.

An adviser I know introduced John to another adviser, who agreed to meet and discuss college funding. The adviser, who asked for anonymity, decided to work pro bono with John and Mary.

The first meeting, six months ago, evidently was a success.

Betty, as we’ll call the advisor, put John and Mary at ease because she provided them with sound advice and alternatives, showing them that there is a light at the end of the tunnel.

“She listened to us and made us feel important, even though we don’t have a lot of money,” John said. “That didn’t seem to be a big deal to her.”

John told me that Betty stressed that most assets, especially retirement savings, should be left alone and not be used to pay for college expenses. She also explained that the situation was more complicated because of the couple’s divorce. Without proper planning, a divorce can disrupt retirement planning.

Betty explained the drawbacks to using a 401(k) for college funding.

If John withdraws funds from his 401(k) or 403(b) before he reaches 59 ½ , he most likely will owe a 10% premature distribution penalty on the withdrawal. This penalty is in addition to income taxes he will owe on the sum withdrawn.

John admitted to me that he didn’t like the sound of that.

Betty also said that 401(k) withdrawals may count as income and affect his daughter’s eligibility for financial aid.

She explained that if John and Mary cannot find a way to pay for college out of their normal income, and if financial aid from a college is insufficient, they should start searching Stafford Loans, parent PLUS Loans, or private student loans.

The bottom line was that they shouldn’t tap into important savings in order to pay for college. There are always alternatives, she assured them.

John called last week to thank me for pointing him in the right direction. His first experience with a financial adviser was a good one.

I suggested that he consider expanding the relationship with Betty to handle more than college planning. Perhaps that will make him more confident about his future financial plans overall, and lead to fewer panicky calls to me.

( I think student loans are a huge financial mistake, made more so by the recent GOP successful efforts to keep the interest rate charged at 3.4%. It is now 6.8%! None of these people has any knowledge of the powerful results that can happen from membership in the Circle of Neighbors Foundation and access to millions of endowment scholarship money each school has at their disposal to help influence the decision made by students as to which school to attend. Click on this image to learn what I’m talking about.)