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Should I cash out my 403 (B) of $20,000 to help pay off a $17,500 private student loan with an 11.75% interest rate?

I have ~ $65,000 in student loans and am 27 years old. The other loans both private and federal have lower then 6% interest and are manageable. But the one high interest loan kills me. I have been turned down for consolidation 3 times because of a high income to debt ratio.

Nov 01, 2014 by Brian from Dover, NH in  |  Flag
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If you withdraw $20,000 to pay off your loan, it may cost 40% in taxes and early withdrawal penalties. (10% penalty plus estimated 30% in Federal income taxes).

So your net amount from your 403b after taxes to pay off your loan may be $12,000. Leaving you with a $5,500 balance at 11.75% and your net worth has decreased by $8,000 (the money that went to taxes and penalties).

What is your 403B earning? You’re young so you could invest it for growth. If it earns 7% you make $1,400 in gains over the next 12 months.

Your interest on $17,500 @ 11.75% would be $2,056. Your net cost for the next 12 months (earnings on the 403B less Interest on Student Loan) would be $656. Your true cost of the interest to your net worth might be 3.8%.

You may be better off seeking other methods of paying off your student loan at 11.75%. Accelerating principal payments or seeking other financing at a lower interest rate, are two possibilities that may be available to you.

It’s impossible to know from the information you have provided the answer to your question. More detailed information is required. Feel free to contact me and provide me with more information on your current financial situation.

Comment   |  Flag   |  Nov 01, 2014 from Thousand Oaks, CA

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Joseph Gissy Level 16

David did an excellent job breaking down the financials for you as well as explaining your net worth after you make your withdraw. It's true to get a good overall picture of your situation more information would be needed. What you can do is sit down with an advisor and look at all your balances and interest and come up with a good attack plan to pay off your debt. Usually it's best to start with the highest interest loans first and figure out how to pay those off, then you move onto the loans with the next highest interest rates and down the line until all your loans are under control. I understand your frustration when you graduate and you have your student debt, a car loan, and some credit cards your debt to equity ratio is well off balanced and it can be very difficult to get a loan to consolidate other loans. Even Ben Bernanke was turned down for a recent home refinance! Anyways, the method I just described, was one method that I have used personally and it worked great for me when I graduated. Of course your situation and no two situations are the same, but generally if done properly you can manage the loans in a much more financially fit way when looking at them in this manor.

Comment   |  Flag   |  Nov 02, 2014 from Woodland Hills, CA

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Brian,

I can't disagree with most of what was said above but to truly be able to get to a net cost/benefit calculation we need to know the term of your loan and the monthly payment amount.

Comment   |  Flag   |  Nov 03, 2014 from Fort Washington, PA

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Like others have said, without a complete financial picture I cannot precisely tailor advice to your situation. In general, you should focus on paying that higher interest loan down as fast as possible. Send in extra pre-payments (as long as there is no penalty!) as often as you can. Cut deep into your budget for that.

If you cash out of the 403(b), you not only have the immediate tax hit, but you are also losing the tax advantaged growth from now until retirement! With, say, 35 years to go, with a modest 5% balanced return, that $20,000 could be over $110,000 in retirement. As long as you can keep paying on that loan, your payments will never add up to that amount.

Here is an illustration of the benefits of paying it down quickly: Assuming you have 10 years and a fixed rate on that loan, your payment looks to be about $250. You will pay about $12,000 in interest over the life of the loan. If you can squeeze in an extra $100/mo you will pay the loan off a few years earlier with only $6,700 in interest total. If you paid an extra $250 a month you could have the loan out of your hair in only a few years and pay only $4,000 in interest.

Your headline interest rate is scary, no doubt, but keep in mind that interest is tax deductible on the front page of your 1040. After a 20% top tax rate, you are only looking at 9.4% interest. High, but slightly less scary. Focus on paying it down by any means necessary.

Lastly, with student loans, I have personally found providers to be fairly helpful. There are often alternate payment options which may modify your payments without much trouble. Don't be afraid to get on the phone with the lender. But let me reiterate - focus on paying that down with your income - not your retirement savings!

Comment   |  Flag   |  Nov 04, 2014 from Ridgeland, MS

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Tunc Tanin Level 10

Sorry to hear your situation. However, I would not advise you to cash your retirement to pay for student loans. One of the advantages student loans is that if you become unemployed you can put off payments for up to 3 years. If you were to become disabled you also dont have to make payments while you are disabled. Please don't just focus on the rate. I recently had a prospect who was advised to consolidate her high interest student loans by refinancing. While it lowered her rate, when she lost her job, she also lost her home. You should focus on paying off all your credit card debt first. You should also continue to make 403b contributions up to the point of getting a match. Senator Warren has been lobbying for this issue and the Republicans have successfully blocked her efforts in the Senate. There are quite of few of you who are unable to refinance their student loans because of these restrictions by the banks

Comment   |  Flag   |  Nov 02, 2014 from Somerville, MA

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