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Started By
Message
Should I pay off my student loans with a 401k account?
Posted on 2/8/15 at 6:58 pm
Posted on 2/8/15 at 6:58 pm
I have $26,000 in student loans remaining from college with about 10 years left to pay on them. Monthly note is $400. Loan 1 is $16,000 with a 4.75% variable rate and loan 2 is $10,000 fixed 2.75%.
I have a $48,000 401k from my first job that I haven't touched since I left the company. My wife and I are currently working and are well on our way of hitting our retirement goals with current 401ks.
Is it a smart move to liquidate my previous 401k and pay off my student loans?
I fully understand that I would have to pay a penalty and taxes on it. My hopes are to have this burden finally paid off while getting my emergency fund right with the remaining dollars. Currently it is not where it needs to be. I am also looking into the real estate game and I want to use the $400 a month to start saving for my first real estate property.
Remaining debt would be house and one new vehicle purchased in November.
Any comments both positive and negative would be greatly appreciated.
I have a $48,000 401k from my first job that I haven't touched since I left the company. My wife and I are currently working and are well on our way of hitting our retirement goals with current 401ks.
Is it a smart move to liquidate my previous 401k and pay off my student loans?
I fully understand that I would have to pay a penalty and taxes on it. My hopes are to have this burden finally paid off while getting my emergency fund right with the remaining dollars. Currently it is not where it needs to be. I am also looking into the real estate game and I want to use the $400 a month to start saving for my first real estate property.
Remaining debt would be house and one new vehicle purchased in November.
Any comments both positive and negative would be greatly appreciated.
7
Posted on 2/8/15 at 7:16 pm to Bigsike
No, never cash in 401 to pay debt
Taxes
Penalties
Loose the gaining potential on leaving it in an IRA
if you die, student loan is forgiven, but if you cashed in your 401 that would be that much less going to your estate
Instead, I would reccomend backing off of your current contributions to only making the required amount to get the company match and apply all above that , as well as any extra money you can scrape up every month ( eating out, cut cable in half, no new cars, etc) and you will have the student loans payed off in no time. " live like no one else does..so you can live like no one else"
Taxes
Penalties
Loose the gaining potential on leaving it in an IRA
if you die, student loan is forgiven, but if you cashed in your 401 that would be that much less going to your estate
Instead, I would reccomend backing off of your current contributions to only making the required amount to get the company match and apply all above that , as well as any extra money you can scrape up every month ( eating out, cut cable in half, no new cars, etc) and you will have the student loans payed off in no time. " live like no one else does..so you can live like no one else"
This post was edited on 2/8/15 at 7:21 pm
Posted on 2/8/15 at 7:28 pm to Bigsike
quote:
I fully understand that I would have to pay a penalty and taxes on it.
This is the main reason why it isn't a smart decision, IMO.
You are basically borrowing from your future at 10% and losing the benefit of that money to continue to grow pre-tax while compounding.
If anything, I would cut back on the current 401k contributions and pay down the loans with those funds.
Hopefully, others here will give you another view of this on the other side of the issue. Good luck.
This post was edited on 2/8/15 at 7:41 pm
Posted on 2/8/15 at 7:36 pm to BlackCloud
I read it as his total student loans balance is $26,000,
If my math is right if he cashed in full balance of old 401, paid 10% penalty and 25% fed income tax and 4% state income he would net about $31K
But I still do not reccomend doing that
If my math is right if he cashed in full balance of old 401, paid 10% penalty and 25% fed income tax and 4% state income he would net about $31K
But I still do not reccomend doing that
Posted on 2/8/15 at 7:39 pm to Tigerpaw123
quote:
I read it as his total student loans balance is $26,000,
You are right....I will edit. Thanks.
Posted on 2/8/15 at 8:08 pm to Bigsike
quote:
I have $26,000 in student loans remaining from college with about 10 years left to pay on them. Monthly note is $400. Loan 1 is $16,000 with a 4.75% variable rate and loan 2 is $10,000 fixed 2.75%
I sure as hell wouldn't. I guess if the variable rate could get out of control I'd think about tackling that but not with my 401k. I'd carry Loan 2 to the end.
This post was edited on 2/8/15 at 8:09 pm
Posted on 2/8/15 at 9:33 pm to Bigsike
Hell no, never cash a 401
Posted on 2/8/15 at 9:57 pm to Bigsike
Depending on your income level, you may be able to deduct some of that interest, which lowers your effective interest rate. Honestly, that's not a bad rate.
What about refinancing the loans to stretch out the payments over a longer term? You probably would pay more over time but would free up some monthly money.
What about refinancing the loans to stretch out the payments over a longer term? You probably would pay more over time but would free up some monthly money.
Posted on 2/8/15 at 10:19 pm to Bigsike
quote:
have $26,000 in student loans remaining from college with about 10 years left to pay on them. Monthly note is $400. Loan 1 is $16,000 with a 4.75% variable rate and loan 2 is $10,000 fixed 2.75%.
I have a $48,000 401k from my first job that I haven't touched since I left the company. My wife and I are currently working and are well on our way of hitting our retirement goals with current 401ks.
Is it a smart move to liquidate my previous 401k and pay off my student loans?
I fully understand that I would have to pay a penalty and taxes on it. My hopes are to have this burden finally paid off while getting my emergency fund right with the remaining dollars. Currently it is not where it needs to be. I am also looking into the real estate game and I want to use the $400 a month to start saving for my first real estate property.
Remaining debt would be house and one new vehicle purchased in November.
Any comments both positive and negative would be greatly appreciated.
Nooooooooooooooooooooooooooooooooooo
Posted on 2/8/15 at 10:32 pm to Bigsike
Hell no. It would be a terrible idea, mainly due to the penalties.
That said, Loan 1 with its variable rate could prove troublesome if rates spike up, so definitely focus on knocking that one out unless you have other higher-rate debts.
I wouldn't even bother about paying more than the minimums on Loan 2. It is only slightly higher than the rate of inflation, and is a fixed rate.
I understand plenty of people get anxious about having outstanding debt, but sometimes debt can be good. Loan 2 is one of these.
That said, Loan 1 with its variable rate could prove troublesome if rates spike up, so definitely focus on knocking that one out unless you have other higher-rate debts.
I wouldn't even bother about paying more than the minimums on Loan 2. It is only slightly higher than the rate of inflation, and is a fixed rate.
I understand plenty of people get anxious about having outstanding debt, but sometimes debt can be good. Loan 2 is one of these.
Posted on 2/8/15 at 10:43 pm to foshizzle
Great info everyone!
What about borrowing on the 401k to pay loan 1 off?
Also what should I do with my first 401k? I've kind of forgot about it and I am trying to clean up my accounts. Should I roll that over into something else?
What about borrowing on the 401k to pay loan 1 off?
Also what should I do with my first 401k? I've kind of forgot about it and I am trying to clean up my accounts. Should I roll that over into something else?
Posted on 2/8/15 at 11:27 pm to Bigsike
quote:
What about borrowing on the 401k to pay loan 1 off?
If Loan 1 were charging 10% or more then I might dig into the numbers but at the current rate it isn't even a close call.
Don't focus on just the fact that you have debt. Under 5% is still pretty cheap, it isn't hurting you.
I suspect that your main challenge is not enough income. Debt that costs under 5% just isn't a big deal provided you can service it.
Posted on 2/9/15 at 1:30 am to Tigerpaw123
quote:
if you die, student loan is forgiven
Not sure this is true.
Posted on 2/9/15 at 6:52 am to Azazello
quote:
Should I pay off my student loans with a 401k account?
quote:
if you die, student loan is forgiven
Not sure this is true.
Yes, it is true IF you were the sole signer on the loan. federally subsidized loans require no cosigners but if you took out a private, u subsidized loan with a cosigner, that person will still be on the hook for the loan.
Posted on 2/9/15 at 7:20 am to Tigerpaw123
quote:
No, never cash in 401 to pay debt
In addition, your student loans are at a fairly generous interest rate AND generate some tax benefits.
I would say the caveat to "never" is if you have a significant, but short-term cash flow problem and you need some breathing room. But, not to free up money to buy other stuff - just to get through a very specific problem for a specified period of time - and even then, it would be an ugly loss you're taking down the line - you can't recapture that time in the market and your 401k is going to make you more than you're saving in interest.
If your choice is a forbearance (which capitalizes interest and is not "free money" in most cases) or cashing in a 401k, do the a/b analysis, but you're still going to be better off in 95% of situations keeping the 401k intact and finding another way to handle student debt.
This post was edited on 2/9/15 at 7:22 am
Posted on 2/9/15 at 8:16 am to Bigsike
quote:
Also what should I do with my first 401k? I've kind of forgot about it and I am trying to clean up my accounts. Should I roll that over into something else?
You can check with the 401k administrator of your current employer to see if they allow rollovers into their plan.
If not you may be able to do an IRA rollover with the same provider to keep the accounts "clean".
My wife has an IRA rollover from a previous employer and her 401k with Fidelity and we can manage both from the same account and login.
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