Retirement Funds To Pay Student Loans
Q: If I had enough money in my retirement acct to pay off my student loans, would that be wise? I am 32 yrs old, have 36K in student loans with a 30 yr payback time and 7.65% interest rate and payments of $258/month. Would it be stupid to use my retirement $ for my student loans, or would
A: -I would advise against it, not from a strictly financial standpoint, but from an emotional one, as well. If you took just enough money from your retirement account to pay off your loan, you will need to spend those same 30 years with the same payments to replenish your retirement, plus you would miss out on 30 years of compounding! If your retirement account returns 5%, your money will double twice in those 30 years. According to the monthly payments you gave, you will be paying almost $93,000 for this loan, and you will be 62 when you are done. I know it must be discouraging to look at that almost $100K that you have yet to pay over the next 30 years, but think how much more discouraging it would be to be 60, looking at the $200K, $300K, or more that you have given up and wondering where your retirement income will come from. Your student loan interest may be tax deductable, and you definately want to look into refinancing; current student loan rates are in the 3%-4% range, but I don't know what to expect for a refinance. I've read some horror stories about extra fees and other games that refinance places like to play, so be careful. If you can't refinance for a better rate, it would make sense to step up your payments, if you can afford it and if your contract allows it. If you could double your payment to $500/month and get that interest rate down, you can have it paid off in 6-8 years. That might mean driving an old car, fewer weekends out of town, another part-time job, or whatever, depending on your circumstances, but you can do it, you're 32 and you can work 12 hours a day and still feel ok. It will not be fun sometimes, but think of how good it will feel to be free from this, and you will easily save over $40,000! -Probably not. Depending on the type of retirement account you have, you would be reamed with fees for early withdrawal and be liable for federal and possibly state and local taxes so you would have to take out more than the amount you owe to pay off your loan after you factor in the costs of taking the money out of your retirement account. As others suggested, try nogiating down the interest rate you're paying for your student loan. -I can't follow the other poster's analysis of why you shouldn't pay off your student loans so I can't really refute it in detail. I can say, however, that you will end up with more money in 30 years if you pay off your loan now and then save the $258 per month (Assuming there are no penalties for paying the loan off or early withdrawel from your retirement account). If you keep the $36,000 in your retirement account earning 5% interest, it will have grown to $160,838.80 on the day you pay off your loan. If you use the $36,000 from your retirement account to pay off your student loan, and then put that $258 per month into your retirement account instead at 5% interest, then after 36 years that stream of monthly payments will have grown to $214,722.73, so you will be $53,883.93 ahead just from making one smart move when you were 32. You can verify all this using the FV function in Excel. First figure out the future value of $36,000 at 5% interest for 30 years, and then do the same for a stream of monthly payments of $258 at 5% for 30 years. I suspect the result would be similar even if interest in student loans is deductible (which I don't know). Also, given the high standard deduction for married couples these days interest deductions are not much of a money saver, if at all.
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