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Should I Drain My Savings to Payoff My Student Loans? – Sean

Written by Steve Rhode

“Dear Steve,

Currently have 4 outstanding debts:

Student Loan: $6,549.39 3.5% – making monthly payments of $827.25

Student Loan: $3,721.63 3.0% – making monthly payments of $537.00

Student Loan: $2,749.59 4.875% – making monthly payments of $399.23

Car Note: $5,136.86 1.9% – making monthly payments of $647.85

Current savings: $39,000…~$55,000 in 401k
No other credit card debts or obligations
Salary $68,500/year

At this rate, I should have all of my loans paid off by November of 2013. Obviously, I am living in the red for the time being until these debts are paid off, and using my savings as my reserves for making these payments.

My current job is secure and do not intend to lose it or move to another company.

My question is whether or not I should use my current savings to pay off the remaining $18,157.47 of my loans today, or if I should continue on this brutal path that I have been on for almost a year, continually exceeding monthly budget and having no opportunity to save? Is it better to get rid of debt right now, if I have the ability, or if I should continue hoarding my cash in case of unforseen circumstances?

Thank you,


Big Scam Dog

Dear Sean,

I really hate to see people drain there assets and leave themselves exposed like that. It always seems it is at those times you need the emergency savings.

While the interest rate would probably be more than you are currently paying on the student loans and if your credit score is better than 700 there might be another way.

What if you instead looked at consolidating those remaining balances in an unsecured debt consolidation loan from Lending Club? It seems the additional interest you would pay would be a cost of prudently protecting your savings account.

Additionally, if you decide to go the Lending Club route, let me know what your loan number is and I’ll help fund it.

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With the unsecured debt consolidation loan approach you could significantly reduce your monthly payment, get the loans paid off now, stop draining your savings account and prepay the consolidation loan to reduce your interest rate.

That certainly seems like a reasonable approach to me.

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


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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.


  • Hi Sean,

    Definitely stay away from the 401k. I have a few questions…

    How much is your monthly income?

    What are your monthly expenses now?

    How much will your monthly expenses be if you were to pay off the loans?

    • Net Monthly Income = $3,150
      If i paid off all debt, my fixed monthly costs would be $700
      Fuel, groceries, dining out, entertainment etc would be roughly $1,500
      Considering no outlandish purchases and living within my means, my total monthly expenditures would range between $2,200-$2,600

      • Monthly expenses now would be roughly $4,600.
        Each month since I started aggressively paying down the debt, I have run in the red ~$1,100-$1,500. Using my savings to finance my living expenses

        • Sean, the advice Steve offered is very sound. I have seen the situations he was referring to all to often myself.

          However, you’ll have 8 months worth or reserves left if you pay them off. I think that’s pretty comfortable. I would pay them off.

          • I’m not a gambler and prefer to see people hold a great hand than hope to draw a better one.

            Ultimately there is no right answer here. If you keep the savings you’ll probably never need it. If you drain the savings and suddenly run into an unexpected situation and come up short you’ll wish you had it.

            All it takes is one accident, one illness, one unexpected event, one major job loss, or any one of a number of unforeseen issues to cause you to have to fall back on that money.

            I was just on the way home and saw a violent accident. I doubt the driver planned for that to happen.

          • You’re absolutely right, anything could happen.

            Murphy’s Law seems to slap me in the face anytime I make a decision like this.

            I don’t think though that there is a better opportunity than now to start re-building my savings, as I don’t expect my monthly expenses to go down as life ticks on…

            Being debt free has been something I have worked extremely hard at for the past year, and I would hate for anything to keep that from happening.

            I appreciate all of the advice from everyone


          • I completely understand the “debt free” argument. Hell, I’m the Get Out of Debt Guy.

            But you should realize that you will never be entirely debt free and this is just one obligation you have. Paying off that big bill still leaves you in debt.

            Debt is really nothing more than future pledge of labor to repay an obligation to come due. Debt comes in many forms other than this loan. When you pay off this loan you will still be in tremendous debt.

            For example, you will be in debt to future taxes, insurance, utilities, housing, and other similar obligations. You will be in debt to yourself to properly save for retirement and in debt to rebuild the savings.

            I get how you have set your mind on achieving this will make you free in some way. And I understand how it has become an emotional goal you want to achieve and thus it becomes a priority for you.

            All I ask is that you consider a balanced approach.

            Best of luck on your journey.

    • I chose to make those payments about a year ago, knowing that I had enough reserves in the bank in order to continue living and paying my bills. The main goal in all of this was to cut my payments by about 13 years. My minimum payments (not including my truck note) was roughly $400/month in student loans and would have been paid off in 2025-2026, which is absolutely ludicrous.
      I have about 8-10 months remaining on all of my remaining debts, continuing on the plan that I am currently on, and my question was more to get some opinions on the matter. I don’t intend on consolidating any of the loans, as they have already been consolidated once, and the time remaining to pay them off is so short – the time and effort to do that is not worth it to me.
      I have enough money to pay off the debts in full, but worry about dumping half of my savings in order to do that.
      Thoughts from anyone who has done this before? Or know someone who took the route of draining their savings in order to be debt free?

      • I think it’s great that you’re paying them off aggressively to avoid interest from accruing. I would pay more per month if I could, myself.

        I would say *not* to cash out your 401k to pay them off quicker. You’ll pay too much in taxes in fees.

        If you have other savings accounts that are earning less interest than your student loans are, then definitely use those.

        • So you think it is better to continue running in the red for the next 8-10 months instead of paying them in full today?
          The difference in the amount of interest accrued from now until the end of the year is so minor, that that $$ is not coming into consideration for me on whether or not I pay today or 8 months from now.

          • By running in the red do you mean using credit cards, or dipping into your 401k or paying late fees or what exactly?

            Paying them in full today is definitely the best option, if you’re talking about using a savings account. But if you’re talking about draining a 401k for paying them in full, make sure you calculate exactly what you’ll pay in taxes and penalty fees. They’re pretty steep. More importantly you’re losing the capital that’s growing interest for you up until your retirement. If those costs are worth it to you (and only you know if it is), then get rid of the loans today.

          • Running in the red budget-wise.
            I am spending more than I take in right now. I am using my savings of ~$39,000 to continue paying other bills and living expenses and will continue to do this until year end, or I could use my savings to pay the debts in full today

          • Stop putting yourself in the red. If it takes a bit longer but you have a safer financial foundation, isn’t that a smarter goal?

            You are a smart guy, make the math add up without blowing your financial safety net.

            If the payments are too step, the reality is you’ll have to slow them down.

            So you pay a bit more in interest. So what? Consider that insurance to maintain your emergency funds. I’ve seen it time and time again. People drain their savings and an unexpected expense comes up that then lands on more expensive plastic.

            Adjust your artificial deadline.

      • Life is about balance. Not all or nothing. There is no reason you can’t achieve your goal within your means without putting yourself in a worse financial position.

        • So you’re of the opinion that a worse financial position is being debt free by year end, and having a little over half of my current savings?

          • It’s nice to be debt free but not at the sacrifice of other things. A balanced approach, even if it takes longer, is always preferential.

          • I’m saying that you have a good emergency fund to protect you in case of an emergency and the amount of time it would take to rebuild it, for me, is not a risk I would take or advise anyone to take. A good emergency fund in the bank is worth more than the hope of replacing it.

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