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Should I Use My Retirement Money to Pay Off My Student Loans? – Cynthia

“Dear Steve,

I would like to know if I would be better off paying off student loans with a retirement plan disbursement from former employer

I have about $26,000 in SallieMae student loans. I will be receiving a disbursement from a former employer for Profit Sharing and Money Purchase plans.

I want to know if I would be better off taking some of that money and paying off my student loans? I know I will be hit with a penalty on taxes, but I am wondering if the credit I would receive for paying off this loans would compensate the difference in penalties?

My income after taxes would be close to what my student loans are.


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The Answer

Dear Cynthia,

If the retirement plan money can be rolled into a new 401(k) or similar plan without penalty then that would be my favored approach. See 6 Ways to Not Be a Broke Ass American After Kicking Your Debt for my concerns over retirement savings.

If the money is already not protected by a retirement plan and will not be additionally taxed or penalized if you take it then saving $5,000 in a savings account and using the rest might be logical. But it sounds like you would be hit with taxes and penalties.

The $5,000 would be to give yourself an emergency fund to draw on if you don’t have one already.

Should I Use My Retirement Money to Pay Off My Student Loans?   CynthiaUsing all the cash if you don’t have an adequate savings account, emergency fund, or retirement savings would be, well, stupid.

There is no credit to be earned by paying off the loan. The only advantage would be you would no longer pay interest on the borrowed money. A paid off student loan is not going to give you a big credit score boost.

So look at it this way. I’m going to assume you are 30 years old. If you retire at 75, which is not out of the question, and you roll that money over and let it grow tax free in a stock index fund it would be worth $2,594,002. And that’s without investing another penny.

So, is paying off your Sallie Mae student loans worth $2.5 million to you?

Please post your responses and follow-up messages to me on this in the comments section below.

Big Hug!

Should I Use My Retirement Money to Pay Off My Student Loans?   Cynthia
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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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