Can I use a 401(k) to pay off student loans? – Believable | Vette Leader

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If you’re having trouble paying off your student loans, withdrawing money from your 401(k) account may be an option. But it could cost you quite a bit in the long run – both penalties and lost investment.

Here’s what you need to know before using a 401(k) to pay off student loans:

Can I withdraw from my 401(k) to pay off student loans?

You can withdraw money from your 401(k) and put it on your student loan, but expect some limitations.

First, you can only pull money out of the vested portion of your 401(k) — the portion you actually own. Your vested benefit depends on your employer’s plan and how long you have been with the company. Contact your human resources department or plan administration for advice.

You should also consider the downsides associated with withdrawing funds from your 401(k). If you decide to withdraw money, you owe federal income taxes on the amount you withdraw. So if you’re in the 24% tax bracket and take out $50,000, you pay $12,000 in taxes.

If you are under 59 ½ years old, you also owe a 10% penalty if you withdraw your 401(k) early. The only exception to this is the so-called 55 rule. This way you avoid the 10% penalty if you have quit your job and are 55 years old or will be 55 years old in the current calendar year.

Cash: How to pay off $100,000 in student loans

What are the risks of withdrawing from a 401(k)?

The penalties and taxes you owe are just the short-term downsides of withdrawing money from your 401(k) too soon. In the long run, you also need to consider other risks, including:

  • You have less money for retirement. Not only are they taking money out of your account, but they’re also reducing the amount that can be invested (and growing, thanks to compound interest). This could mean a lot less saving until your retirement.
  • The return is probably not the same. The typical 401(k) grew nearly 15% in 2021, according to Mid Atlantic Capital Group. You’re unlikely to save an amount equal to those gains by paying off your student loans. Federal direct loans, for example, have interest rates as low as 4.99% to 7.54% as of July 2022. Interest rates on private student loans, while higher, are also typically well below that 15% mark.

Before using your 401(k) to repay student loans, make sure you use a good student loan repayment calculator to understand the potential implications.

Use the calculator below to estimate how long it will take to pay off your student loan debt. You can also use the slider to see how increasing your payments can change the payout date.

Enter loan details

total payment

overall interest

Monthly payment

If you increase your payments by

monthly on your

loan at
%you will pay

a month and pay off your loan up
January 2021.

Does refinancing make sense for you?
Compare offers from top lenders to determine your actual savings.

Check the personalized prices

Checking interest rates will not affect your credit score.

Additional ways to pay off student loans

Tapping your 401(k) isn’t your only option when you’re struggling to pay off your student loans.

If you’re struggling financially, consider these other options. Please note: most of these options apply to federal student loans only.

  • Seek procrastination or indulgence. Forbearance and forbearance allow you to temporarily reduce or delay your payments. The difference between the two lies in how interest accrues. With a deferral plan, you won’t be charged additional interest while your payments are suspended. With deferral plans, interest will continue to accrue on your loan.
  • Sign up for an income-based repayment plan. Income-Related Repayment (IDR) plans adjust your monthly payment based on your income level. The US Department of Education offers four types of IDR plans, but most only require you to pay 10% of your monthly discretionary income. Sometimes your payment can even be zero.
  • Apply for credit waiver. In some cases, student loan forgiveness programs can eliminate your remaining student loan balance. This may be possible if you are a teacher or other public employee, or your school was closed while you were enrolled.
  • Redeem your credit. This is an option if your student loans have defaulted. You typically have to pay 15% of your discretionary income to rehabilitate your loan.
  • Consolidate your federal loans. When you consolidate your federal loans into a direct consolidation loan, you combine multiple loans into one.
  • Refinance your loans. This can reduce your interest costs and make payments easier.

You should also contact your credit servicer. They can guide you through options that might be helpful in your specific situation.

Learn more: Income Oriented Repayment: Which Plan Should You Choose?

Can I use an IRA to pay off student loans?

If you have a Roth IRA, this may be a better option for paying off your student loans than a 401(k). With these accounts, you pay no penalty as long as you only withdraw an amount equal to or less than your total contributions.

Keep in mind: If you withdraw the earnings from your account, you owe a penalty – 10%, just like 401(k)s.

Roth IRA withdrawals are also not taxable. Because you’re funding them with after-tax dollars — money you’ve already paid taxes on — you can always withdraw them tax-free.

Despite these benefits, withdrawing from your Roth IRA means less money — and less growth — when it’s time to retire. Additionally, not everyone is eligible for a Roth IRA. For example, if you are single and earn $144,000 or more annually, you are not eligible to contribute. For married couples filing jointly, the threshold is $214,000.

Cash: 7 ways to lower your student loan interest rate now

Other ways to pay off student loans earlier

If you’re hoping to pay off your loans faster, refinancing can help by replacing them with a new loan with a lower interest rate or better repayment terms.

If you choose this option, do your research on your lender as interest rates and terms can vary widely. You should also use a student loan refinance calculator to get an idea of ​​what a refinance could mean for your monthly payment and payout schedule. (You might be surprised at the difference this can make.)

Step 1. Enter your loan balance

Step 2. Enter the current credit information

Step 3. Enter your new credit information to start calculating your savings

Lifetime Savings
Increased lifetime cost

New monthly payment

Monthly Savings
Increased monthly costs

When you refinance your student loan
interest rate, you
can save
pays a surcharge

monthly and repay your loan by
. The total cost of the new loan will be

Does refinancing make sense for you?
Compare offers from top lenders to determine your actual savings.

Check the personalized prices
Checking interest rates will not affect your credit score

Finally, whenever possible, you should make an additional payment or two, as this will reduce your principal balance and the interest accrued on your loan. A good option is to use your tax refund on your loans. It’s also smart to take advantage of vacation pay, inheritances, and other good fortune.

See more: 11 Strategies to Pay Off Student Loans Faster

About the author

Aly J Yale

Aly J. Yale is a mortgage and real estate agency. Her work has appeared in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.

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