Author Topic: PAYING OFF STUDENT LOANS  (Read 2995 times)

bkromer

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PAYING OFF STUDENT LOANS
« on: May 03, 2014, 08:54:36 AM »
We made a deal with our 2 kids--we would pay for 2/3 of their first bachelor's degree. The younger one graduated last May (both employed in their chosen fields/self-supporting) and now we are paying off $41,000 in parent plus loans between 7-8% interest. I checked into borrowing from my 401k to pay it off and they said no way. I turn 59.5 next month and I think I will pay the loans off with a straight "in-service" withdrawal.  I already contribute 20% of my salary. I figure the income tax on the 401k withdrawal to pay off the loans won't be so bad if I can max my 401k contribution thanks to the extra $500 a month we won't be paying to the US dept. of ed. Any thoughts? Does this sound like a reasonable plan?

nereo

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Re: PAYING OFF STUDENT LOANS
« Reply #1 on: May 03, 2014, 09:02:47 AM »
Is there any other source of money that you draw from to pay back the loans, even if it took 1-2 years?  Taxable savings accounts? A portion of your paycheck each month?

In general I favor keeping the 401(k) untouched for as long as possible because you will still have tax-deferred growth.  at 7% I'd use taxable savings first, plus money from your take-home pay, and only then the 401(k).

BTW, that's a really generous thing you did for your children.

Gin1984

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Re: PAYING OFF STUDENT LOANS
« Reply #2 on: May 03, 2014, 09:07:21 AM »
Can you get a lower rate from a HELOC?  7-8% is pretty high.

Cwadda

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Re: PAYING OFF STUDENT LOANS
« Reply #3 on: May 03, 2014, 09:15:34 AM »
I agree with nereo. If you and your house have jobs (or you only), then it would be better to take out of savings and accounts other than the 401k. This is because if you have greater than or equal to $41,000 in your 401k and it's making between 7% and 8% then you are basically gaining enough to cover the interest on the loans. Plus that money in the 401k compounds over time. So it's probably better to wait "the longer the better" on your 401k.

I'm not sure how close you are to FI, but maybe you could work until the loans are completely paid off and then still have plenty in your tax-advantaged accounts.

Also, I'm not sure how effective this is, but maybe look into "refinancing" the loans in a way. My parents borrowed money against equity to help pay for the education for my sister and myself. I'm not exactly sure how it works, but if you message me I could probably talk to them about the details.

Edit:
Oh right, a HELOC! That's what it is! Thanks Gin1984

bugbaby

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Re: PAYING OFF STUDENT LOANS
« Reply #4 on: May 03, 2014, 01:56:17 PM »
401k withdrawal is considered *income* and will be taxed at your marginal rates... eg if you're in 33% bracket you withdrawal 60k to net 40k for the loans !!

if your kids aren't paying other loans and they qualify for student loan interest deduction you could gift them the $ up to annual gift limit to pay and deduct 2500 interest.

I don't have much to add to the above
« Last Edit: May 03, 2014, 02:19:03 PM by babybug »

Rebecca Stapler

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Re: PAYING OFF STUDENT LOANS
« Reply #5 on: May 03, 2014, 03:12:24 PM »
if your kids aren't paying other loans and they qualify for student loan interest deduction you could gift them the $ up to annual gift limit to pay and deduct 2500 interest.

Hmmm ... I don't understand this option at all. The OP has Parent PLUS loans, which are under the OP's name, not the child's.

As to the OP's original question ... when it comes to having a debt hanging over your head, you should do what will make you sleep better at night as long as it's somewhat rational. Would it be fair to say that you could expect a 7% return on your 401k investment over 10 years? (I usually guesstimate 8% when I consider my low-cost index fund, but if your 401k has a high cost or is also invested in lower-yield areas, then maybe 7% would be out of the question)

The way I see it, if it were my 401k, I would assume that the interest I'm earning there is going to mirror the interest I'm paying to the PLUS loan. If you take a withdrawal, it will get taxed and then you're not only paying more interest on that money than you're paying on the PLUS loan in any given year, but you're losing out on any interest that the money would be earning. So, I would leave the 401k alone and, if the student loans are really bothering you, find something you can cut back on to funnel some extra money towards those loans each month.

bugbaby

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Re: PAYING OFF STUDENT LOANS
« Reply #6 on: May 03, 2014, 03:53:39 PM »
my bad... I didn't see all the loans are parent plus.

if your kids aren't paying other loans and they qualify for student loan interest deduction you could gift them the $ up to annual gift limit to pay and deduct 2500 interest.

Hmmm ... I don't understand this option at all. The OP has Parent PLUS loans, which are under the OP's name,