Is It Wise to Withdraw from Your 401(k) to Pay Off Student Loans Early in Your Career?

Okay, the next question is from Steve Jerbs. Is that inside? I don’t get that one. Steve Jerbs, did you say it on purpose like that? That’s the literal name, Steve Gerbs. But the way you said it, did you all hear it? The inflection on the “JS” just goes up. I’m sorry; I think it reminded me of Steve Jobs, but in some weird way of saying it. I don’t know; you figure you would, Al, or something. Or I thought it was a joke. I didn’t get it. We’ll keep going; we got some interesting usernames today. And Steve, I don’t know why she’s saying your last name like that, but we’ll just give it a review. It literally says, “Steve Jerbs JS.” Oh, there; your voice does it naturally. It’s a really cool thing; I love the inflection. Not a Steve Jobs, I think it is, but you say “jobs” low, like normal. Like you’re saying “derbs,” just all of a sudden, it goes up an octave or something. I feel very vulnerable today with all these usernames; you guys are really throwing me for a loop here.

Okay, so Steve has a question. I’m sorry; I’m dying. Okay, it says, “I’m 28; I have 70k in private student loans and about 70k in my company 401K. They match 100% up to 7%. Would it be worth withdrawing what I have to pay down the student loan in the next year?” Discuss; give insights, right? Would it be worth drawing, like, withdrawing from his 401K? I mean, truthfully, you don’t even need the interest rate. I wouldn’t take money out of my—I was going to say, what do you—I know what you’re going to say. I think the question is, “Hey, I’ve got this student loan debt, but I’ve also got this retirement asset, right? I’ve got my employer; they do a 7% match, 100% up to seven,” is what he said, right? So my employer’s putting money in this. Should I be clever and maybe start taking some money out of this 401K and use that to satisfy the student loans?

BR, what are some of the issues with people pulling out, especially young people at the age of 28, pulling money out of 401Ks? Let’s just start with that part, and then we can talk about the student loans.

Well, I mean, when you’re 28 years of age, you have the most powerful ingredient to wealth creation, which is time. So if you take money out in your 20s, that money essentially—you just killed your army of dollars. I mean, because they now don’t have the potential to grow upon themselves in a very powerful way. I mean, think about that 20-some-year-old person making that type of decision. That might feel good. And this is the problem with all bad things in life. In the short term, they feel really good when you make bad decisions, whether you’re talking about overeating, if you’re talking about going out there and buying a new outfit, or even buying the latest new gadget that causes you not to save or do things. It all feels so good in the short term, and that’s why people who are very logical in addictions and other things kind of reach these bridges where it makes sense right now. But you’re robbing your future self.

And the skill set of deferred gratification is the most valuable thing because it allows you to leverage that component of time and the compounding growth. Now, a lot of people would say, “Yeah, but he has $70,000 of private student loans.” This is the part where, once again, Coach Corley shows up, and I yell at people. Yes, this is where incremental decisions—every—you have to put a fire under the fact that not only, and this is where the messy middle comes from, do you have to save for your future self, but you do have to extinguish those high-interest debts like the student loans and other things, especially if they’re unfavorable. Get creative, and I know that sounds so much easier to say than to actually do, but you’ve got to figure out how to cut your expenses to the bone, how do you actually save more by earning more? Because you really only have two choices: cut expenses or you have to make more money.

But going and robbing your future self by taking retirement assets is a bridge to nowhere. Yeah, not only are you taking off the field one of the things that really concerns me is that retirement assets are specifically designed for retirement. So much so that if you were to pull these dollars out at age 28, you know what happens? You’ve got to pay taxes on them. So you’re pulling money; you’ve got to pay taxes, and you’re going to get hit with a penalty. So everyone’s like, some people think, “Well, what about the interest on student loans or private? They could be pretty bad.” Well, let’s say that you’re in, like, the 15% marginal tax bracket. Maybe you live in a state that’s 5, so you’ve got, you know, let’s say 17% on your—then you’ve got a 10%, put to 27.

I bet those student loans aren’t at 27% because that’s essentially the penalty you would pay—the cost of getting access to those dollars. I just don’t think that pulling money out of retirement makes sense almost in any scenario, especially to pay for student loans because it’s so costly for young folks to do that because of the taxes and penalties. For more information, check out our free resources.