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I am thinking of using my 401k money for my grad studies. What are the pros and cons of this idea?

Here is my situation:
I am a non-US citizen/permanent resident who have worked in the US under work visa for the past several years. During that period I have saved money in the 401k plan.

Now I am leaving my work and going to grad school this fall.

I am eligible for student loans with a co-signer who is a US citizen or a permanent resident . But I am reluctant to impose on my friends and acqaintances before exploring every possibilities to make it on my own.

After I graduate in two years, I plan to work outside the US.

Here's what I know:
I have two options:
1. I can take the money out of 401k and pay for school, OR
2. I can take a loan out of 401k.

Under the first option, I pay taxes. Tax is determined by my income bracket (which will be minimal if I go to school full time) plus 10% penalty. Is this true?

Under the second option, I pay taxes and I have the opligation to repay the loan. Again the tax is determined by my income bracket but there is no penalty. Is this true?
When do I have to start the repayment?
Can I take the money out as a loan and later decide not to repay? If so how is the tax penalty calculated?

Thanks in advance.

(posted in paying for college, fools and their money, and retirement planning)
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