I am a full-time student who has 5k in personal loan debt, and 3k in Credit Card debt. I have $7500 in my 401k from an old job, should I use it to pay off the debt? I'm only 26

I am a full-time student who has 5k in personal loan debt, and 3k in Credit Card debt. I have $7500 in my 401k from an old job, should I use it to pay off the debt? I'm only 26
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#1

As said in the title, I am a 26 year old full-time student who has about the same amount of money in debt as I do in my old 401k. Prior to being a student I worked for a year and put away a lot of my money into the 401k. After finally quitting a job I hated and utilizing my GI Bill benefits, I am pursuing school. The problem I face now is, eventually my emergency fund is going to run low because I am still trying to keep up with this debt and be on track! I am paying the minimums on a personal loan from Prosper which is $335 a month. The loan will be completed in May of 2020 but I’d rather finish it faster. I also have about 3k in credit card debt. It is at a 0% interest rate for the next 6 months though. Most of it was for school supplies(including a laptop), moving fees, and a sudden car expense.

I manage all my funds through the You Need A Budget program and have steadily made gains in the past two years. But becoming a student has been challenging with the loss of income. I work about 15 hours a week part time but only make about ~400 a month. Would it be advisable to take the tax hit on my 401k to withdraw and make these next 4 years easier?


#2

Rustysnail, you seem aware of the consequences of withdrawing your 401K savings (you’d probably net something less than $6,000). Smarter people than I can give you some perspective on how to weigh the longer-term costs but some additional info would be helpful:

You are paying the minimums on both credit card and loan out of your emergency fund?

Are you also paying living expenses out of your emergency fund?

How much is left in it?

If you paid off your debt, would your part time income cover your living expenses?

(One thing we at NerdWallet believe pretty firmly in is having something – anything – in reserve for true emergencies: an emergency room visit, car repair, bail money. $1,000 may be plenty, maybe less if you have a family and social safety net you can count on.)

If you have a 0% credit card your credit seems to be in great shape; preserving that also serves as an “emergency fund” of a sort if things truly hit the fan.

The best thing is, you’re thinking ahead.


#3

I have about $3400 remaining in my savings. Currently I make about $1100 per month from VA disability and $1200 a month during the school year for a housing allowance. With my part time job my average income per month is around $2700. All my bills including rent, car, insurance, phone, debt and general living expenses usually total around 2400 a month. I do not take much out of my emergency fund (maybe 200) a month because I want it to last. I am putting no money away though and I feel I am increasing my risk later on in the next year or two. I have 4 years of college to get through and while the tuition is paid for I still have to pay every other expected bill. I am not taking on student loans so i do not have that option either.


#4

Hi, Rusty. The consequences of draining your retirement funds are pretty severe, which is why we don’t recommend it to pay off debt. It’s not just the taxes and penalties you’ll pay. It’s the loss of future tax deferred returns. The younger you are, the greater the damage from withdrawing that money because you’re losing decades of future compounding. A $7500 withdrawal today could mean you’d have $182,000 less at retirement. The cost is just phenomenally high.

I’m curious why you’re not using student loans at all. Federal student loans have relatively low rates and lots of consumer protections and payback options. Could you tell us your thinking on that?