I owe about 25K in student loans. I pay double the minimum each month, but am impatient. I have enough money in my 401K to pay them off. Since I’m only 25, should I cash out and pay off my loans? I want to be out of debt.
Let me see if I can articulate a very important piece of advice, in the most effective way possible. Okay. Here goes. My answer is the next sentence. Nooooooooooooooooooooo.
I love that you want to get rid of debt. I also love that you are angry about the debt. But don’t commit brutal math sins. At a 7% hypothetical rate of return over the next 30 years, the $25,000 you would use to pay off your debt would grow to $190,306, if you left it the hell alone. But there’s more.
You would need to pay taxes on the liquidation of your 401k, as well. The IRS would slap 20% out of your hand for taxes. And the IRS is an angry muse. She’s going to take another 10% as a penalty for a non-qualified withdrawal. You’d have to withdrawal $35,714 in order to net out $25,000. And if you wiped out $35,714, then you are thumbing your nose at a potential $271,864, 30 years from now.
There is only one reasonable solution: use your income. Last week I wrote about a young lady that paid off $28,000 worth of student loans in just three years. The harder you push to pay these off with your income, the less dependent you will become on your income. If you can achieve a level of financial independence by paying off debt, then you will be on your way to serious financial success.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.