“Dear Steve,
I am a 27 yr old single working mother and I have appr 25K in 401k funds. I also have appr 15K in credit card debt that is making it tough to pay monthly bills. At this age, should I consider cashing out my 401K and paying my ccard debt off.
I also have to consider that my daughter recently had trauma to her head and the doctor bills have yet to come in. I own two rental homes and have one car payment. Other than that, I have no debts. Please advise
Should I cash out my balance in 401K to pay off credit card debt?
Taneah”
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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It seems odd to me that student loans can not be included in a bankruptcy case. People can buy all sorts of toys and cars and things and have that debt wiped out but not loans for education. My daughter took out a student loan from a private company and started paying back her loan immediately after graduation. Unfortunately it was a variable interest rate and now they won’t consider locking her in on a fixed rate. She has paid over $2,000 and not one penny has come off of her principal amount owed. What can she do? Should I borrow money from my 401K and have her pay me back?
Mary,
The student loan situation is terrible. People keep saying that student loan debt is “good” debt and rationalize why they should borrow. And when I try to explain the dangers to that group, they think I’m crazy and don’t know what I’m talking about. Oh but I do.
Recently I discovered LendingTree.com and that might be a much better way for you to get access to cash, without penalty and at reasonable interest rates to pay off the student loans. Check out LendingTree.com.
Steve
I owe $167,000 in student loans, I have not been able to make payments on them at all since I got out of school 4 years ago so the interest is just amassing on them. I am paying of a $20,000 credit card debt right now and am able to keep up with that but there is nothing for the student loans. I just keep deferring and forbearing them but that keeps adding interest on. I don’t know what to do. Is there any solution? Should I file bankruptcy with the credit card and start paying the student loans? I make about $35,000 a year. I have constant anxiety over this debt. Please help!!
Diana,
If your loans are government backed, hopefully not Sallie Mae, contact your loan servicing company and ask for information about the Income Contingent Repayment Plan, ICRP. That will give you a repayment plan based on your income but the credit card debt will not be factored in. You might find that you’ll have to go bankrupt to discharge the credit card debt to afford the student loan payments. But one thing is certain, deferring the loans is not a solution. It only grows them.
Steve
Carolyn,
First and foremost, if you have not already, you need to get a handle on your budget to see how much income vs outcome you have. Look at it closely, make sure to add all of “your” living expenses. Steve Rhode has a good budgeting tool and book that you can get on this website called “Eliminate Your Debt Like a Pro”. This is in PDF and can be downloaded for free.
In my opinion, you have one priority, and that is to take care of your house (the $194,000 refinance). I do not know if you have more equity in the house beyond the mortgage, but that is your home, shelter. You do not want to lose it or place it in jeopardy. Regarding refinancing again, only consider it if you can get an interest rate that is favorable. Since your credit score has taken some hits, you probably will not be able to get the best rate, so this may not be an option in the near future.
Regarding your credit score, sounds like there are other factors impacting your score other than the two late payments. If you have not reviewed a copy of your Credit Report, you need to do so. There are three reports, you only need to obtain one. The TransUnion is the cleanest and has full account numbers. You should obtain a copy and see what else is negatively impacting your score. Liz Pulliam Weston’s book “Your Credit Score” will take you through the process of reviewing your credit score, diputing bad information, and how to rebuild your credit.
Your credit card debt is another issue. This debt most likely can be wiped out in bankruptcy, should you need to go there. You need to work on this debt and keep it current, if you can, so your credit score does not suffer. “Your Credit Score” mentioned above and “Deal With Your Debt” by Weston can help you evaluate all these options. As I mentioned at the beginning, you need to understand your budget before you make any decisions. Taking on more debt, by refinancing at a higher interest rate or for more cash, debt consolidation loans, and debt reduction plans are not a favorite of mine. See “Bankruptcy v. Debt Reduction http://tinyurl.com/cpxnra and “Debt Reduction Programs” http://tinyurl.com/cv5rte
. They may seem like the best alternative in the short term, but they generally have big negative impacts in the long run.
You need to fully understand your circumstances. Read all three books mentioned above, analize your budget, and talk to a bankruptcy attorney, most have a free consultation. Get all the facts and understand your options before you take action. You may find that your finances need some tweeking and you can make it on your own without refinancing or tapping your savings. But whatever the option, do take action.
I know it is hard to not want to help your children. Unfortunately you are not helping them stand on their own two feet financially. You are in a worse position than they are. Your financial resources are limited, their’s is not. They need to do thier own budgeting, get part time jobs, and be responsible for their debt. You unfortunately co-signed some of their debt and also went into debt yourself for their benefit. It has to stop. You hopefully have many years left to live, YOU need all your resources. Read the books, get advice, look at the big picture.
Best of luck.
Jeff
JJeffJacksons last blog post..Debt Consolidation Stories
I am almost 70 years old. I have 34,000.00 in my retirement plan. I owe 194,000.00 (from a refinance to help my kids finish college.)…on my house and around 25,000.00 in credit card debit which I did to help my daughter with her master program. They were paying me back 800.00 a month but have not been able to for a few months which leaves me little to live on without taking some $ from my retiremnet fund. My last FICO from Experian was 690…( it used to be GOLD they told me.) .there were two payments almot 3 years ago on another credit card for the kids that were late….my children did not make the payments (not realizing how that affected my credit..to late now.) and I found out and made them myself right away via telephone….So 2 dings on my report….I called BOA and they said they would take it off their account records but I could not with the credit reporting places…I also co-signed for my grandchildren for college…all deferred but still on my reports…How can I free up some $$….should I pay off all or some of the credit card debit and then just take the 800 a month from my children when they can start payments again and save it…Just make some bad judgements but cannot say no to my children and things were tight for them at the time etc…should I try to refinance or get a home equity loan if I can to pay off the credit cards and avoid those high finance charges etc….
I am looking forward to your advice…Thank you….Carolyn
Taneah,
I would not cashout your 401K to pay off credit card debt. You worked hard, at such an early age to save $25K for retirement. First of all, if you cash it out you will be penalized and maybe only see 2/3 of the amount you cash out. Secondly, as long as the 401K is an approved plan, it is protected through bankruptcy.
Seek some guidance. Consider reading Liz Pulliam Weston’s book Get Out of Debt. She discusses fully your question, and answers with much more authority. This book also provides great, easy to read, info on analizing your situation, addressing the problems, and getting to work on your debt.
You have done a great job of paying yourself first. Preserve that. Maybe consider reducing (not eliminating if possible) your continued contributions to your 401K to free up some money to help with your credit issues. But alway pay yourself first, via 401K or other savings. Find ways to do this and maintain your debt.
Jeff
Jeff Jacksons last blog post..Debt Consolidation Stories