Debt Articles

Should I Cash Out My Retirement to Settle My Private Student Loans?

Written by Steve Rhode

Question:

Dear Steve,

I have a bachelors degree, a masters degree in English and Writing, and I currently write freelance for about $12,000 per year. My husband makes the money currently, $55K. We have $199,000 mortgage left, $13K personal loan, and $90K in student loans. Yikes.

We’re paying off the personal loan as fast as we can, but the student loan payments are too high to make any headway. We’re both behind on our retirement and are seeing just 6% to -2% returns. I don’t know why people always project 12%.

I’ve been trying to outthink this debt for 10 years since I graduated, and I’m not making progress. Now I’m thinking about cashing out my 30K retirement, with the penalties, and using what’s left to pay most of a private student loan, 22K Discover. The rest is with Fed Loan and NelNet. But I sense this is not smart. So what is?

And I look forward to your emails. I’ll be thinking about these loans for years to come.

Rachel

Answer:

Dear Rachel,

There are two ways of looking at this problem. The first is mathematically and the second is emotional.

Putting all sorts of Dave Ramsey moral guilt trips aside about repaying the debt the reality here is you feel the repayment of the current private student loans is impacting your ability to manage your finances.

This is really a problem based on hyperbolic discounting.

Hyperbolic discounting refers to the tendency for people to increasingly choose a smaller-sooner reward over a larger-later reward as the delay occurs sooner rather than later in time. – Source

The one factor here you have no control over is time. You can repay debt but you can’t repay or recover lost time.

In investing, a key component to maximizing returns is to start investing as soon as you can and it will tremendously multiply your end result.

You can use my online calculator here to see what the difference is between starting now or hoping to start later.

If you start saving for retirement at $500 per month with a 10% return and don’t retire till 70 then you will have $3,872,148.24. If you wait to start when you are 35 then you will have $1,898,319.03. That’s a huge loss.

You may be able to settle the debt on the private student loans without raiding the money you have already saved. I would suggest you have a chat with my debt coach friend Damon Day to talk about the ins and outs of this approach.

If settling this debt could put you back into a position to quickly ramp up retirement savings then dipping into the current retirement funds may make sense. However, I would make the decision based on the math, not the emotion.

Also, I don’t know what you have your retirement invested in but a stock index fund like this one has returned a 5-year average of 10.49% and a 10-year average of 14.44%. Just a thought that returns are based on what the account is invested in.

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About the author

Steve Rhode

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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