Get Out of Debt Guy

Should We Use Retirement Money to Pay Off Student Loans?

Posted June 11, 2013

WRAL Reader Question

Dear Steve,

My husband is 57 and has a 401K account from a previous job. We have a student loan for our son at 6.75% interest.

Would it be better to withdrawal enough money to pay off this loan than to continue to make the monthly payment?

Ann

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Answer

Dear Ann,

It's really a personal choice but an early withdrawal from the 401(k) can result in a 10 percent penalty and taxes due. I'm not a fan of that.

We have a retirement crisis on our hands here that is going to explode when people today go to retire. Recently I wrote Odds are You are Going to Retire Hungry and Poor and the facts are simply disturbing. 

According to recent surveys, 49 percent of workers surveyed said they are not at all confident or not too confident they will be able to reach retirement age with enough money to live comfortably. That's an avoidable crisis in my book.

While the 401(k) money might feel like free money just sitting there, it is not. If that fund is not returning much over the past few years it's not invested correctly. The stock market today is at record levels and even if those funds were in a stock market index mutual fund you'd be earning over a 10 percent return. That means if you took money out of those funds to pay off lower interest rate debt you'd be losing more and paying taxes and penalties on top of that.

Heck, the year to date return on the Vanguard Total Stock Market Index Fund is 16.75 percent. I'm not recommending that particular fund, just using it as an example.

Talk to the company that is managing the 401(k) and adjust how it is invested to maximize your return for retirement. Let's get those fund working hard for you rather than just looking at them as stagnent and not worth much.

Steve Rhode
WRAL Get Out of Debt Guy

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3 Comments

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  • Scubagirl Jun 14, 2013

    Have your son pay back HIS student loan! You raised him now it's time for him to payback

  • Terkel Jun 14, 2013

    beef, that was my thought too.

  • beef Jun 14, 2013

    Why not ask your son to pay the loan? He is the one who recieved the benefit.

About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.