cashing out 401k to pay off student loans?

[vardenafil]

well im kinda depressed right now. i graduated in 2004 and have been paying 800 dollars a month in student loans ever since. i just checked my balance on my student loans and ive only paid down 4 thousand in principal. i feel like im never going to pay this crap off. i recently seen an article about a harvard bussiness grad who payed off 90k in loans in a year or so. and it got me thinking. if i cash out my 401k after taxes i can pay off about 40k in loans. and if i stop contributing to my 401k and put that into the remainder of the loan it will be payed off in 3 years. anybody done this? or having any advice?

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[pezdispenser]

In most cases cashing out a 401(k) is a bad idea because you will pay full income tax at your current tax bracket (28%?) PLUS a 10% penalty. And then you might not have enough to retire on.

Taking a loan against your 401(k) and/or stopping contributions is a bad idea as well because you are missing out on the employer match.

Are you able to provide more details about your situation such as loan balance and length, interest rates, and maybe even other expenses in your budget?

 

[xiphoid2010]

well im kinda depressed right now. i graduated in 2004 and have been paying 800 dollars a month in student loans ever since. i just checked my balance on my student loans and ive only paid down 4 thousand in principal. i feel like im never going to pay this crap off. i recently seen an article about a harvard bussiness grad who payed off 90k in loans in a year or so. and it got me thinking. if i cash out my 401k after taxes i can pay off about 40k in loans. and if i stop contributing to my 401k and put that into the remainder of the loan it will be payed off in 3 years. anybody done this? or having any advice?

Early withdrawal from 401k is subject to a 10% penalty. Usually not a good idea.

 

[vardenafil]

i have 3 student loans that total about 800/month in payments: one loan at 36k @ 3.2% interest, 37k @ 3.2% interest, 47k @ unknown interest rate. the only other debt i have is my car @ 220/month. i currently rent @ 800/month. i only work part time right now (25 to 30 hours a week). i currently am unable to find full time work. lack of fulltime work is the main reasons i want to pay the loans fast as possible.

 

[rph3664]

DO NOT touch your 401K until you're 59 1/2, with only one exception: catastrophic medical bills.

Just do not do it.

 

[pezdispenser]

i have 3 student loans that total about 800/month in payments: one loan at 36k @ 3.2% interest, 37k @ 3.2% interest, 47k @ unknown interest rate. the only other debt i have is my car @ 220/month. i currently rent @ 800/month. i only work part time right now (25 to 30 hours a week). i currently am unable to find full time work. lack of fulltime work is the main reasons i want to pay the loans fast as possible.

Hmm something doesn't add up if you've been paying for 8 years and the principal only went down $4,000, unless that unknown loan is charging usurious interest rates. You'd better find out...

Ignoring that, if lack of fulltime work is why you want to pay off your loans quickly, I think it is a bit counterproductive. Because if your hours get reduced even further, then you could run into some serious cash flow problems, if you have no money left after paying the loans. The safer thing to do would be to SAVE more and build up an emergency fund. Not diverting your savings (401(k)) or money leftover in your budget towards paying down debt. Besides, 3.2% is a low interest rate, which your 401(k) can easily beat.

 

[FarMD2012]

I agree with pezdispenser. How can you been paying for 7-8 years but only paid off 4000 in principle? Better check that unknown interest. But 3.2% interest rate is ridiculously low. I believe all the grad federal loan interests are going back up to 6.8% now.

Cashing out 401K would cost you, and is not a great idea. Because of inflation, taking a long time to pay off your low interest loans actually might not be as bad as you think.

 

[vardenafil]

I agree with pezdispenser. How can you been paying for 7-8 years but only paid off 4000 in principle?

my loans all charged origination fees, and while i was in school my loans were incurring interest. so my 120k student loan ended up being more like 130 something before i even started repaying. so i guess technically your right ive paid more than 4k in principal. its just going to fees and interest not the origanal loan amount. my understanding from looking at my statements most of my payment goes to interest and very little to principal. i figure its like a mortgage you dont actually pay the principal until the last few years you just pay the interest first. so if cashing out is a no no. what about taking the 1k a month i usually invest into my 401k and dumping that on loans. id still have some money in my 401k doing its magic while i try to get my debt knocked down?

 

[Dr Wario]

my loans all charged origination fees, and while i was in school my loans were incurring interest. so my 120k student loan ended up being more like 130 something before i even started repaying. so i guess technically your right ive paid more than 4k in principal. its just going to fees and interest not the origanal loan amount. my understanding from looking at my statements most of my payment goes to interest and very little to principal. i figure its like a mortgage you dont actually pay the principal until the last few years you just pay the interest first. so if cashing out is a no no. what about taking the 1k a month i usually invest into my 401k and dumping that on loans. id still have some money in my 401k doing its magic while i try to get my debt knocked down?

If all of your debt is really at 3.2% I would not pay it off any sooner than you have to. Do not forget, that for every dollar you put into your 401k you get back about 35% as a tax refund, so if you put 1k per month into your 401k it really only costs you 650. You can reasonably assume that the returns on your 401k will be higher than 3.2%, however if you have loans that are 5% or higher you may want to consider paying those off more quickly. If nothing else, at least put in enough to max your employer match.

 

[xiphoid2010]

I will echo some of what others said. 3.2% is a good rate. And as you are part time, you probably qualify for tax deduction off of the interest, especially if you lowered your AGI by contributing to 401(k). The inflation is 2.9%, so after tax deduction on the interest, inflation is actually eating up your student loans for you. Further more, early withdrawal or loans have major drawbacks/penalties that make them generally a bad idea.

So the bottom line is don't hurt your 401k for this.

The only thing is to find out what that unknown loan interest is. If it is truly high, then I would advise you make extra monthly payment towards that loan, and spell it out to the lender that the extra payment needs to go towards the principle. But even before that, you need to secure an emergency fund (6 months worth of living expense in a liquid account such as money market).

p.s to only paid off $4000 in principles on $120K at 3-4% interest after 7-8 years, you would have to have been unemployed during most of that time or is paying on an extended 25-30 year schedule. Double check.

 

[confettiflyer]

Way dumb idea, don't touch that 401k.

 

[Momus]

if i cash out my 401k after taxes i can pay off about 40k in loans. and if i stop contributing to my 401k and put that into the remainder of the loan it will be payed off in 3 years.

I am not a big advocate of not maxing tax deferred account since once you lose the space it'll be gone forever. However, you have been a pharmacist for 8 years but only managed to save $40k, so I assume you never max 401k contribution. I assume you are pretty debt averse (3.2% is nothing compare to ~5-8% gain your investment can give you).

If you don't like debt at 3.2%:
Don't tap 401k, but keep contributing max to get the match and spill the rest into student loan. There are a lot of options to go to kill the loan but I would think this is probably the least damaging to your finance.

Major emphasis to keep expenses down to a minimum. All of the savings can go toward student loan. You can save AT LEAST additional $1000/month if you maximize to minimize expenses. Some options might not be applicable to you:
1. Less lunch/dinner out
2. Cut cellphone bill
3. Cut cable bill
4. Less vacations
5. Live with roommate/move to a cheaper apt
6. Bike to work/get a beater for a car
7. Less toys
8. Stop buying new clothes
9. Buy item in bulk/only at discount/generic only
10. Basically, live like a broke student...

Another way is to simply increase your income. Get a full time job or another part time job. Be in retail/move out if you have to even if it means you are going to hate it for a while.

 

[Pharmacy Kid]

I'm guessing you don't qualify for PSLF?

 

[ACE Rx]

Something just doesn't add up. You've been paying $800 a month for 8 years so basically 96 payments. You basically paid $76,800 and only knocked off $4,000 in principal?

 

[Its Z]

Yup...somthing isnt right....I paid $800 per month and paid off $50k in 10 years.....towards the end the payments were less..let me look at the amortization schedule

 

[Its Z]

Amortization schedule showz $117k loan with 4% rate with $800 per month is paid off in 17 years with $40k inprincipal payed after 8 years.

 

[pezdispenser]

so if cashing out is a no no. what about taking the 1k a month i usually invest into my 401k and dumping that on loans. id still have some money in my 401k doing its magic while i try to get my debt knocked down?

I think 12k/yr into your 401(k) is already too much for your income level and overall situation. Because as you have seen, once you put it into your 401(k), it is very expensive to take out before retirement, should you need it for other purposes.

Also, the tax benefits of a 401(k) actually DECREASE, the more money you put in, because you still get taxed when you make withdrawals, and making big withdrawals will put you in a high tax bracket.

So your 401(k) needs to be not too much, not too little, but just right. Definitely put in enough to get the full employer match, but while the actual amount is way beyond the scope of an internet discussion board, I'll take a wild stab at 8%.

Now, I see you're still insisting on paying down your loans so I take it you're very debt averse. Personally, I would love to borrow $120k at 3.2% x 10-30 yrs unsecured, so that I could invest in other things. Even stock like WAG has a dividend yield of 3.1%, JPMorgan Chase 3.2%, etc. But if you still want to pay down your loans, at least make sure you have an emergency fund of 6 months of expenses, still funding your 401(k), and then you can put what's left over on your loans.

 

[Pharmpills]

well im kinda depressed right now. i graduated in 2004 and have been paying 800 dollars a month in student loans ever since. i just checked my balance on my student loans and ive only paid down 4 thousand in principal. i feel like im never going to pay this crap off. i recently seen an article about a harvard bussiness grad who payed off 90k in loans in a year or so. and it got me thinking. if i cash out my 401k after taxes i can pay off about 40k in loans. and if i stop contributing to my 401k and put that into the remainder of the loan it will be payed off in 3 years. anybody done this? or having any advice?

You graduated in 2004 so you have been a pharmacist for 8 years so you should have aton of money. One big problem is why are you paying only 800 and not more? Second you should have a very strong savings, cash flow after working so long. I've been a pharmacist for not too long and i already have a solid savings (so no excuse). I've seen pharmacist who have been working 10-20 years still paying loans and it's ridiculous because they have the cash to pay it off or who knows what they are doing with their money, mybe buying a mansion or 50k car? i really don't know. All i can say is that as a pharmacist myself i see the major cash flow that comes in bi-wwekly even after taxes and i've learned how to keep monthly cost low.

 

[IlDestriero]

I wouldn't stop making your tax advantaged retirement deposits unless they're financially impossible for you to make, especially if you get an employee match, that's free money you're leaving on the table. You can NEVER have too much retirement savings/income, and anyone who suggests otherwise doesn't understand taxes, tax brackets, interest income, etc.
You didn't say how much you have in savings now outside of your retirement account, or anything about other debt. Your first priority should be to put aside money for an emergency. The common recommendation is 6 months. Your situation may be a little different if you're single with no dependents. You might be safe with less, as you would be more flexible about moving in with someone else temporarily, your parents, relocating quickly, etc. Anesthesiologists refer to this as the F--- You account. If things get really bad, you can say FY and walk. Ideally you need enough to maintain all your expenses, insurance, etc. for 6 full months and relocation money as well. In the past you could get a fair return in laddered CDs, but those days are gone, and not coming back anytime soon either.
Actually, the first thing you should do is secure full time employment. It sounds like there are no good opportunities in your area, and there haven't been for some time. You need to relocate. It sucks, but it sounds that's what you have to do. Look elsewhere for a full time job, and consider other options available to you. You can't keep going on like this. I can't live in my first choice of locations because the jobs there for me are ALL horrible, it's a shame, but it's the way it is, so I just vacation there.
Too many people live paycheck to paycheck, at all income levels. Don't remain one of those people. Find out where you can cut costs and put a few months of emergency money aside, then work on your low interest loans, all the while making finding a full time job your top priority.

 

[IlDestriero]

Yup...somthing isnt right....I paid $800 per month and paid off $50k in 10 years.....towards the end the payments were less..let me look at the amortization schedule

Sounds like he's on the 20 year (or longer) graduated plan. His initial payments probably didn't even cover the interest.

 

[pezdispenser]

I wouldn't stop making your tax advantaged retirement deposits unless they're financially impossible for you to make, especially if you get an employee match, that's free money you're leaving on the table. You can NEVER have too much retirement savings/income, and anyone who suggests otherwise doesn't understand taxes, tax brackets, interest income, etc.

Maxing out a 401(k) at $17k/yr is not for everyone.

I'm assuming the OP makes about $80k/yr and is in the 25% single tax bracket. Maxing out $17k/yr (increasing 2.5% each year for inflation, but not including over 50 catch up contributions), and assuming a 6% earnings rate, you would end up with $3.35mil after 35 years or age 59.5 when you can start making withdrawals.

Assuming a 4% earnings rate and 25 years in retirement, you can withdraw about $160k/yr increasing 2.5% each year for inflation. That's around $67k in today's dollars so it should be about right to retire on. But you do need to pay tax on that. Adjusting the tax brackets for 2.5% inflation and assuming the tax rates remain the same (probably not true), you will still be in the 25% tax bracket from $84k-$203k, so actually there was no tax benefit here. Only that the earnings were able to compound before being taxed.

However, it gets complicated because there are other options besides a 401(k) such as a Roth IRA or even a fully taxable account which allows you to take advantage of long-term capital gains and qualified dividend tax rates (though these look like they will be increased or abolished).

Also consider the liquidity and income of the OP. Money in a 401(k) should generally be considered locked away until 59.5 y/o. But lots of things could happen where you need the money during your life. The situation is quite different from an anesthesiologist with massive income.

 

[xiphoid2010]

I'm assuming the OP makes about $80k/yr and is in the 25% single tax bracket. Maxing out $17k/yr (increasing 2.5% each year for inflation, but not including over 50 catch up contributions), and assuming a 6% earnings rate, you would end up with $3.35mil after 35 years or age 59.5 when you can start making withdrawals.

Assuming a 4% earnings rate and 25 years in retirement, you can withdraw about $160k/yr increasing 2.5% each year for inflation. That's around $67k in today's dollars so it should be about right to retire on. But you do need to pay tax on that. Adjusting the tax brackets for 2.5% inflation and assuming the tax rates remain the same (probably not true), you will still be in the 25% tax bracket from $84k-$203k, so actually there was no tax benefit here. Only that the earnings were able to compound before being taxed.

You are forgetting that 401k contribution receives tax deduction in a top down manner, while withdrawal from it is taxed in a bottom up fashion.

So let's simplify things a little: assume inflation and tax bracket increase at the same rate so effectively cancel each other out, making the value of the dollar stays as today nominal dollar, and so tax brackets also stays the same.

Suppose a RPh makes $100K a year, his marginal tax bracket is 25%. Putting $17K into 401k today, he gets to deduct 25% of that amount.

When he retires, his 401(k) withdrawal will be taxed like this: first $10K of the withdrawal = ~$0 tax (personal exemption + standard deduction). next $8K = 10% tax bracket. The next $16K at 15% tax bracket, before finally getting into 25% bracket.

So unless you plan on withdrawal more during retirement than your annual income now, contribution into a 401k or traditional IRA will let you avoid taxes now at your highest tax bracket, and then start paying taxes from the lowest bracket back up when you withdrawal, resulting in a lower overall tax rate.

 

[BidingMyTime]

I agree with everyone, do not touch the 401K. The tax penalty is just not worth it. As for future contributions, there are certainly advantages to "maxing out", but if its personally important to you to pay your loans (and that is certainly a good thing to do, its not like you want to stop contributing to it to buy a new car or something), then just contribute enough to get your maximum employer match (anything less is throwing away free money.) So contribute at least enough to get your employer match, then work on your budget so you can start paying more each month on your loans.

 

[Dr Wario]

"so actually there was no tax benefit here. Only that the earnings were able to compound before being taxed."

Do me a favor and run the numbers. Calculate the % difference in future value by putting an extra 33% (that is what it would take to equate the 25% tax savings) more money into an account earning 6% over 35 years. I think you will find the answer somewhat...harrowing.

 

[pezdispenser]

You are forgetting that 401k contribution receives tax deduction in a top down manner, while withdrawal from it is taxed in a bottom up fashion.

So let's simplify things a little: assume inflation and tax bracket increase at the same rate so effectively cancel each other out, making the value of the dollar stays as today nominal dollar, and so tax brackets also stays the same.

Suppose a RPh makes $100K a year, his marginal tax bracket is 25%. Putting $17K into 401k today, he gets to deduct 25% of that amount.

When he retires, his 401(k) withdrawal will be taxed like this: first $10K of the withdrawal = ~$0 tax (personal exemption + standard deduction). next $8K = 10% tax bracket. The next $16K at 15% tax bracket, before finally getting into 25% bracket.

So unless you plan on withdrawal more during retirement than your annual income now, contribution into a 401k or traditional IRA will let you avoid taxes now at your highest tax bracket, and then start paying taxes from the lowest bracket back up when you withdrawal, resulting in a lower overall tax rate.

ah I see now. Thanks for explaining it for me

 

[pezdispenser]

"so actually there was no tax benefit here. Only that the earnings were able to compound before being taxed."

Do me a favor and run the numbers. Calculate the % difference in future value by putting an extra 33% (that is what it would take to equate the 25% tax savings) more money into an account earning 6% over 35 years. I think you will find the answer somewhat...harrowing.

I'm retracting that. I incorrectly based my reply on a calculation I did a while back to try to compare putting $6,944 into a 401(k) or $5,000 into a Roth IRA (the same amount after 28% tax) and of course the future value of the 401(k) was much, much higher, but the problem was the entire amount gets taxed, while the Roth doesn't, so the difference was not as good as it first looked

Actually I still chose the Roth because I can have a brokerage account in there and trade tax free.

 

[Dr Wario]

I'm retracting that. I incorrectly based my reply on a calculation I did a while back to try to compare putting $6,944 into a 401(k) or $5,000 into a Roth IRA (the same amount after 28% tax) and of course the future value of the 401(k) was much, much higher, but the problem was the entire amount gets taxed, while the Roth doesn't, so the difference was not as good as it first looked

Actually I still chose the Roth because I can have a brokerage account in there and trade tax free.

That is why I max 401k and roth + buy rental property to tax diversify in addition to asset diversification.

 

[DedicationNSU11]

wow there is definitely good financial advice here I could use when I graduate (income now is only enough to scrape by)

 

[workinhard]

If all of your debt is really at 3.2% I would not pay it off any sooner than you have to. Do not forget, that for every dollar you put into your 401k you get back about 35% as a tax refund, so if you put 1k per month into your 401k it really only costs you 650. You can reasonably assume that the returns on your 401k will be higher than 3.2%, however if you have loans that are 5% or higher you may want to consider paying those off more quickly. If nothing else, at least put in enough to max your employer match.

Agreed! If your loans are that low, that is basically free money in this economy. You will never get a rate that low. Most students come out with 6.8-8.5% interest rates! Lock in at that low rate, pay the minimum and save your other income to invest elsewhere or in property.

Buy a dual occupancy property. Live in one apartment, rent the other out so you have no rent to pay. Rental rates are high in this bad economy because people cannot get the loans nor do they want to take the risk of home ownership.

If you take this advice, you will have a NICE property at a low interest rate of probably around 3.5% as well. You will be financially SET. This is the best thing you can do. Since you have good income, you could eventually get a second property like this and really put yourself in a great situation long term.

Take this advice, become a millionaire, then always remember me

 

[Its Z]

Being a millionaire is overrated nor does it guaranty you to retire in comfort.....
You need health insurance.....thats why we will be working forever.....

 

[Momus]

Being a millionaire is overrated nor does it guaranty you to retire in comfort.....
You need health insurance.....thats why we will be working forever.....

A million is definitely not enough nowadays.

If you have have a pre-existing medical condition or cancer, you are probably ****ed and no one will give you health insurance and you will need to work forever to get group insurance. But if you are healthy to begin with, you can retire and buy your own insurance. To retire, you need at least $3-5M for FU money so you can buy your own insurance and retire (4% of $3-5M you can draw indefinitely = $120-200k/year income).

 

[RickRossPharmD]

That is why I max 401k and roth + buy rental property to tax diversify in addition to asset diversification.

As a 25 y/o freshly minted Pharmacy manager, I love this post. My company does not 401k match, yet I still invest heavy for the tax exemption. We have a pension program (I know...) that I'm already vested in. I need to look to the Roth IRA because the benefits of the 401k really aren't there in my situation. As far as rental properties, what areas of the country do you recommend? Any particular situations like foreclosures preferred? Or is buying and renting locally the best option?

 

[pezdispenser]

Being a millionaire is overrated nor does it guaranty you to retire in comfort.....
You need health insurance.....thats why we will be working forever.....

Agreed. I've lost all ambition to retire before 65 because health insurance is just too damn expensive I'll be screwed if they raise the Medicare age even higher.

 

[Rx MPLS]

A million is definitely not enough nowadays.

If you have have a pre-existing medical condition or cancer, you are probably ****ed and no one will give you health insurance and you will need to work forever to get group insurance.

I'm pretty sure the Affordable Care Act is meant to take away some of these issues, though health insurance you buy yourself is almost never as good as group insurance.

Any one of us could develop a pre-existing condition at any time, so don't think being "healthy" will save you.

 

[xiphoid2010]

As a 25 y/o freshly minted Pharmacy manager, I love this post. My company does not 401k match, yet I still invest heavy for the tax exemption. We have a pension program (I know...) that I'm already vested in. I need to look to the Roth IRA because the benefits of the 401k really aren't there in my situation. As far as rental properties, what areas of the country do you recommend? Any particular situations like foreclosures preferred? Or is buying and renting locally the best option?

If you are just starting out, I recommend locally at first. I know there are realtors and property management companies anywhere, but it's better if you know the area and can handle it yourself. Having a property management companies manage a property for your will also cost you 6-10%, and that's not counting repairs.

If you live in a house/condo right now, you can simply rent it out when you move or buy another house. This way you know all there is to know about it already.

 

[WVUPharm2007]

As a 25 y/o freshly minted Pharmacy manager, I love this post.

Ah, new grads. The only people naive enough to willingly become a PIC in retail pharmacy...

 

[rph3664]

Ah, new grads. The only people naive enough to willingly become a PIC in retail pharmacy...

 

[pezdispenser]

Ah, new grads. The only people naive enough to willingly become a PIC in retail pharmacy...

Shhh don't tell them...

 

[browneyes021]

Ah, new grads. The only people naive enough to willingly become a PIC in retail pharmacy...

That's funny I plan to run as far as I can from any PIC position. It ain't worth the time to do all the extra crap around the pharmacy, not to mention all the meetings they have to go to.

 

[Shnurek]

Actually, the first thing you should do is secure full time employment. It sounds like there are no good opportunities in your area, and there haven't been for some time. You need to relocate. It sucks, but it sounds that's what you have to do. Look elsewhere for a full time job, and consider other options available to you. You can't keep going on like this. I can't live in my first choice of locations because the jobs there for me are ALL horrible, it's a shame, but it's the way it is, so I just vacation there.

I think this is the key statement.

 

[vardenafil]

I think this is the key statement.

i actually have been looking to relocate. i have licenses in 2 states and working on my third. part of my problem is im stuck in retail and my current company is stringing me along with empty promises of full time work. my current store is always on "the bubble" for earning extra pharmacist hours. if only our store would improve "xyz".

but anyways.... im sorry its taken me so long to respond. im the lucky bastard who got to work over labor day weekend and labor day. so first off im on the 25 year plan for each of my student loans. the loans dont have fixed interest rates. right now the lowest rate is 3.2% the highest is 3.7%. they are the lowest they've ever been. usually they are much higher. so here is an example of one loan. it will give you an idea of what im talking about. original loan amount was 38k, capitalized interest on that loan 6k, total capital paid 7k, amount owed as of today 36.6k. so basically ive paid almost 20k in 8 years on that particular loan and ive only dropped the original loan principal from 38k to 36.6k. now i have 2 other loans like this. i've only dropped about 8k total in principal on the 3 loans.

i take it that cashing out my 401k may be a bad idea. so i did some thinking and number crunching and came up with this. if i only put in 2% of my income into my 401k. (2% is what my company matches to) id have an extra 600 dollars post tax dollars a month. if i can dump that and an extra 400 dollars from penny pinching into my student loans monthly id have my small student loan paid off in 24 months according to some generic web calculator. in this scenario im still saving for retirement but knocking loans out?

 

[xiphoid2010]

i actually have been looking to relocate. i have licenses in 2 states and working on my third. part of my problem is im stuck in retail and my current company is stringing me along with empty promises of full time work. my current store is always on "the bubble" for earning extra pharmacist hours. if only our store would improve "xyz".

but anyways.... im sorry its taken me so long to respond. im the lucky bastard who got to work over labor day weekend and labor day. so first off im on the 25 year plan for each of my student loans. the loans dont have fixed interest rates. right now the lowest rate is 3.2% the highest is 3.7%. they are the lowest they've ever been. usually they are much higher. so here is an example of one loan. it will give you an idea of what im talking about. original loan amount was 38k, capitalized interest on that loan 6k, total capital paid 7k, amount owed as of today 36.6k. so basically ive paid almost 20k in 8 years on that particular loan and ive only dropped the original loan principal from 38k to 36.6k. now i have 2 other loans like this. i've only dropped about 8k total in principal on the 3 loans.

i take it that cashing out my 401k may be a bad idea. so i did some thinking and number crunching and came up with this. if i only put in 2% of my income into my 401k. (2% is what my company matches to) id have an extra 600 dollars post tax dollars a month. if i can dump that and an extra 400 dollars from penny pinching into my student loans monthly id have my small student loan paid off in 24 months according to some generic web calculator. in this scenario im still saving for retirement but knocking loans out?

I think the first thing you you should look into is consolidating your loans and lock in the low rates.

At an average of 3.4-3.5%, and with interest being tax deductible at your income level, the interest rate you pay right now less than inflation. So there is really no return on investment by paying it off soon.

But the interest rate won't stay this low forever, and you don't want to be stuck with an adjustable rate loan when the rates shoots up to 6-7% or higher. So try lock in the current low rates.

PS: student loan tax deduction starts to be phased out when your AGI is >$60k, and totally gone when >$75k. Sounds like your income might be near the cut off, so you will probably want to contribute more into the 401K to lower your AGI, so you get more of the tax deduction. So cutting back on 401k contribution to try to pay more on a low interest loan will actually hurt you with a double whammy.

 

[PharmL]

ISo cutting back on 401k contribution to try to pay more on a low interest loan will actually hurt you with a double whammy.

I believe the only tax credit you get is $2500 if you meet the AGI limits. I pay much more than this in interest every year. It's not worth it to get your AGI down enough to receive a $2500 credit. However I do I agree it's beneficial to put as much as you can into your 401k because it does help your overall taxes in the end.

I borrowed $5000 from my 401k a few years back...young,dumb and going through a messy divorce. Don't do it. I paid $2000 to the IRS just for the courtesy of using my own saved money.

Also I have to add that I have a federal loan for $87000. After paying $500 per month since 2008 (approx $18000 give or take...500x36ish months) with 5.5% interest, I have only paid $3000 down on the principle.

 

[xiphoid2010]

I believe the only tax credit you get is $2500 if you meet the AGI limits. I pay much more than this in interest every year. It's not worth it to get your AGI down enough to receive a $2500 credit. However I do I agree it's beneficial to put as much as you can into your 401k because it does help your overall taxes in the end.

What I am trying to say is this: the OP probably makes close to $75k right now working part time. If he trys to skip 401k contribution to pay off student loans faster, he would (1) pay 25% federal plus whatever state tax on that amount, AND (2) be ineligible for student loan interest tax deduction. Hence the what I referred to as double whammy.

Say he puts $15k into 401k, he will avoid almost $5k in federal and state income tax and capture the full student loan interest tax deduction (up to $2.5k less tax). Pay $7.5k less in taxes for putting $15k away for your own retirement, that's almost like an immediate 50% return just for planning your finances correctly.

 

[farmadiazepine]

Do not cash out your 401k.

Instead, from here on out until all your student loans are paid off, DO NOT put money into your 401k. You can finish your loans off much faster in a year or two.

The only expenses your should be spending money on are rent, utilities, car/gas, and food. No money for anything extra whether it is going out, getting beers, buying gadgets, or whatever it is you like to do.

What you should be doing is as soon as your get your paycheck, set aside exactly how much you need for the two weeks or month period, save an extra $100 from each check into an emergency fund. then put literally everything else towards the loans.

That's discipline. Do that.

 

[xiphoid2010]

Instead, from here on out until all your student loans are paid off, DO NOT put money into your 401k. You can finish your loans off much faster in a year or two.

Respectively disagree with this part. My reasoning is 401k is (a) use it or lose it 17k per year tax advantaged vehicle and (b) power of compounding is exponentially related to the investment time frame.

So if OP skips $17k 401k contribution, and he permanently loses: ($17k x 25% x #of years he skips)^ [(1+ %ROI) x # of years to retirement]

Example: ($17k x 25% x 5 yr) ^ [(1+ % ROI) ^ 30 yr to retirement] = $194k. And this is a meer crude approximation, not compounding each of his years he misses separately, which would mean results is he miss out on about $200k.

To be fair he would pay off the loan much faster, and but keep in mind that his interest rate is only 3.4%, and is of now likely tax deductible, meaning actual interest of <2.6%. This can not stand up to the 25%+ tax deduction + 7% average ROI to be expected interest long term.

If I was in OP's shoes, I would (1) Consolidate and lock in the current low interest rate, and (2) contribute enough to 401k so my AGI maximize interest deduction and (3) adjust my asset allocation for to maximize return vs. Risk. eg. 80% various stock indexes + 20% bonds+money market if my investment horizon is 30+ yrs.

 

[Momus]

Another option is to borrow from your 401k and pay the loan (@~4-5%). Then pay back 401k loan. The difference is you get the interest income % for yourself instead of giving it to other people, and the interest is tax sheltered. Problem with this is if the market soars again next year or next couple years, you will miss the rally.

After you decided to live like a pauper to save money for 2 years, you will have 5 options:

1. Cash out and pay tax - Worst option
2. Stop contribution and pay loan - 2nd worst option as you leave money on the table
3. Take 401k loan to pay student loan - Think market is going down? Do you feel lucky? Pro and cons
4. Minimum contribution to get match and pay loan - as a person who is very debt averse, this is one of the least damaging to finance and rewarding psychologically when you have 0 debt
5. Max contribution, and keep paying loan as best as possible - Best option financially but delaying student loan pay off

 

[sosoo]

the OP is scaring me. i have twice his interest rate and $141,000 loan. but im more hopeful to pay it off in 5 years. somehow, someway. may the buddha help me. ^_^,

 

[Skrumpy]

the OP is scaring me. i have twice his interest rate and $141,000 loan. but im more hopeful to pay it off in 5 years. somehow, someway. may the buddha help me. ^_^,

Pay off as much as you can.. live like a hermit for those 5 years and it should be possible. Find a good debt snowball calculator (I use a good spreadsheet) you can also find calculators online. Debt snowballing is awesome and most people don't take advantage of the idea. I calculated that my GF and I will be able to pay off both of our student loans, our home, our cars, etc in 13 years living our current lifestyle (which is spending a bit more than we should). Seems like a long time.. but being debt free in 13 years is a powerful motivator for us and in the scheme of things is not that long of a time.

Also depending on how risk averse you are you may do an alternative that some people are doing and that is investing the extra money you'd be putting towards your loans. The average market return is 9-10% per year and if this is more than your student loan interest rates some people recommend just investing that money. Obviously, that is a calculated risk as you could end up losing your money and not have anything to show for it. Still some people are successful doing this and can even pay of their loans much quicker than simply paying them directly. Not only that but at the end of your repayment you can have a nice chunk still invested in the market. Almost like a little endowment for yourself.

 

[All4MyDaughter]

Pay off as much as you can.. live like a hermit for those 5 years and it should be possible. Find a good debt snowball calculator (I use a good spreadsheet) you can also find calculators online. Debt snowballing is awesome and most people don't take advantage of the idea. I calculated that my GF and I will be able to pay off both of our student loans, our home, our cars, etc in 13 years living our current lifestyle (which is spending a bit more than we should). Seems like a long time.. but being debt free in 13 years is a powerful motivator for us and in the scheme of things is not that long of a time.

Also depending on how risk averse you are you may do an alternative that some people are doing and that is investing the extra money you'd be putting towards your loans. The average market return is 9-10% per year and if this is more than your student loan interest rates some people recommend just investing that money. Obviously, that is a calculated risk as you could end up losing your money and not have anything to show for it. Still some people are successful doing this and can even pay of their loans much quicker than simply paying them directly. Not only that but at the end of your repayment you can have a nice chunk still invested in the market. Almost like a little endowment for yourself.

Love the debt snowball approach. In the last year, we've paid off all of my higher interest student loan accounts (about 50K) and paid off my car and now we're redirecting all of the money that was tied up in those payments to my other student loan accounts. Looking at my last statement, all of my remaining accounts are at 6.5% so I must have gotten an interest rate break for being a good customer or something.