Should I use my 401 (k) to repay student loans?

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The central theses

  • Avoid paying back with your 401 (k) student loan.

  • An early withdrawal of 401 (k) could cost an additional 30% in taxes and penalties.

  • If you are taking money out of your 401 (k) you may not be ready for retirement.

If you are feeling the pressure of student loan debt, you may be looking for ways to get rid of it easily. Moving money off your 401 (k) seems like a good idea, especially if you’re not close to retirement. But that approach of “robbing Peter to pay Paul” can put you in a worse position in the long run.

You have many options to repay your student loan, but only over time can you increase your retirement savings. Here’s why you should avoid repaying your 401 (k) student loan:

You pay additional taxes. You will automatically lose 20% of your 401 (k) payout in taxes if you withdraw before the age of 59. That is, if you withdraw $ 20,000 to repay student loans, you will get $ 16,000. However, you may see some of that money back at tax time.

You will pay fines. For withdrawals before the age of 59, the IRS typically applies a 10% penalty when you file your tax return. Given the taxes and penalties, your payout has now dropped from $ 20,000 to $ 14,000. That’s $ 6,000 less to pay off student loan debt and $ 20,000 less that could have grown by the time you retire.

You will be poorer in retirement. If you take money out of your 401 (k), over time you will lose the returns. For example, if you dump your account from $ 30,000 to $ 10,000 to repay student loans by age 30, you could cost $ 180,000 in retirement benefits by age 67.

You may feel harassed by the creditors or you just want to get out of debt faster. In either case, you need to consider other options before getting into your retirement fund.

If you are having trouble paying student loans

Federal student loan

Federal student loans are rolled into one interest-free and payment-free forbearance by October 2021. That means you don’t have to make any payments on these loans now. And they do not arise.

If you continue to need help making payments while the grace period expires, plan on signing up for one Income-based repayment plan. You can’t sign in until the indulgence ends, but talk to yours Student loan service provider Now go through the registry and collect the documentation you will need. Your payment could be as low as $ 0.

If your federal loans are already in default, speak to your loan service provider about ways to a Student Loan Default Resolution. Student loan rehabilitation and consolidation are two common options. Both can lead to enrollment in an income-related repayment – and both leave your pension fund intact.

Private student loans

Private student loans do not qualify for government forbearance. You are required to make regular payments on these loans unless you make other arrangements with your lender.

Many lenders have it special utilities for those financially affected by the COVID-19 pandemic. They may also have additional indulgence options that they offer on a regular basis.

Contact your lender to find out what is available to you.

Should You Consider Bankruptcy?

Typically, you must be already late and suffering from “undue hardship” – you may not be able to maintain a minimum standard of living without hoping for that change – and you have made good faith efforts to repay your loans .

If your student loans have come into collections, be aware that like a 401 (k), your retirement funds are usually out of the reach of creditors.

When you want to repay your student loan quickly

You may not have trouble paying your student loans, but you want to repay them quickly for other reasons. You may want to lower your debt-to-income ratio or you may be stressed because debt is hanging over your head.

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