I have a 401k with $24,500.00 in it. Two of my student loans (together it’s $11,048) are at 9.5% interest rates (ouch!)
Should I borrow from my 401k to pay those off? Then amp up my contribution rate to pay it back? (I currently contribute 8% of my salary)
Or is this a really, really stupid thought? I just **** getting hosed on these loans!
I would do it if i was you. Just make sure you pay it back even if you pay interest because at the end you are only paying to yourself in this case instead of someone else.
9% is a high rate…. and if you already have the money to pay for it, go yet to be!
Borrowing from your retirement is rarely a excellent thought. But this may be an exception. The huge question here is – what is the interest rate being charged by your 401(k)? If it is significantly less, then ultimately you will be building out. I reckon I force do it in your case.
Building early withdrawals from a retirement account is a terrible thought! You’ll be hit with taxes and huge penalties! get out of this if at all possible.
I’d suggest you scale back your 401k contributions until you pay off your loans. If your company matches a certain amount of your 401k contributions, then only contribute enough to get the full company match. That is FREE money and you shouldn’t pass it up!
Then cut back on your spending as much as you can to make huge payments on your loans each month. Include a note with each payment telling them to apply your payment toward the principal of the loan. Some loan companies will try to cheat you if you aren’t specific about what you want to do with the money.
This will take more time than if you just cashed out your 401k, but trust me, it’s worth it.
Stacia Z is really right. On top of this, any amount that you borrow on your 401k is not accruing its normal interest. (most 401k’s accrue 10.9% tax free)… not to mention that you’ll be missing out on the compounding interest of the interest accruing on that interest. It’s exponential.
Your student loan is tax deductible which means that depending on your tax bracket, you’re really only paying like 6-7% while your 401k is rising by 10.9%.
You’d be better off refinancing or taking out a home equity loan which is also tax deductible to lower your payments and the cost of your student loan. rates are currently around 6.5% and after taxes, more like 4%.
With your balances being as low as they are, you should investigate applying for a low interest credit card which as an introductory rate of 0-3% for up to a year and transfer to that. Then get aggressive and pay it down… when the year is up, do it again.
Bottom line, don’t ruin the long term just to make the small term simpler. I could go into the numbers, but just know that every day your money isn’t earning interest for you is three time more painful than the high payment you are building on student loans.
I’d cut back your deferrals into your 401k and start doubling and tripling up on the loan payments. Then when it’s paid off, take the amount that you were paying on the loans and place that into the 401k to try to catch up. That way you can still keep the compounding effect of your current balances while lowering the payoff time on your student loans.
Don’t like that option??? Take the loan but make it a 3 year loan instead of 5. Payment will be about $375/month but you’ll have it paid off quickly rather than dragging it out. If you can do that and not stop your deferrals then you’ll be ok. Certainly you’ll be taking a hit on your returns but because of the up and down nature of the current market conditions you should be fine.