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I have just over $140,000 in consolidated student loan debt with a fixed interest rate of 5.75% on an income-based payment plan. My current and previous employers qualify for the Loan Forgiveness program but I won't be eligible for loan forgiveness until the year 2023.

Currently I'm having to use my savings to make the monthly $491/month payment and incurring debt just to get by. At age 47 I have no desire to change careers as I love what I'm doing yet only make $55,800/ year gross.

I have $145,000 in my IRA which I'm really wanting to avoid using, but am seriously considering withdrawing at least $75,000 from the IRA to pay down my student loans. Penalty and taxes would be $32,000. That in itself wouldn't be worth an early withdrawl, but at this rate I'm incurring a lot of student loan debt by the day and it's causing a great deal of financial and emotional stress.

At what point does it make sense for me to take my IRA money and pay down some of this incredible student loan debt?

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There are a few puzzles here. Can you explain what you mean by "incurring debt"? Are you saying you had to borrow more money to pay off your loan, or that the loan balance is getting larger because you're not paying any interest? Also, why are you having to do that (and/or dip into savings)? If the payment is $491/month, that would be slightly more than 10% of your income, which is not fun but not completely hopeless, so it would seem possible to make financial changes elsewhere in your life to handle the debt payment. –  BrenBarn Aug 4 at 6:47
    
Can you give us more detail about the loan forgiveness program, is this the appropriate link? studentaid.ed.gov/repay-loans/forgiveness-cancellation. Does it completely eliminate your debt? Or just some of it? If just some, is it a fixed amount? Or a % of what remains? –  Scott Aug 5 at 3:02
    
Well someone didn't understand the implication of my jokey comment so I will say it more plainly. Out of context ie. hot questions/search results it looks like you are talking about funding from the terrorist organisation. The title at very least could and probably should be worded better to avoid that. –  JamesRyan Aug 5 at 10:58
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@JamesRyan - anyone who would confuse the Irish Republican Army with an Individual Retirement Account on a personal finance website, probably doesn't pay too much attention to anything else, either :) –  warren Aug 7 at 19:51
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@JamesRyan - not true at all, the URL starts with "money.stackexchange.com". If what you're saying is true, there should be no page or site on the internet that has "IRA" in its title UNLESS it is talking about some branch or faction of the Irish Republican Army. That's not rational :) (or any of the other myriad uses for the acronym) –  warren Aug 8 at 13:39

7 Answers 7

That's unlikely to be a good move. After the penalties, you would have roughly $40k-$45k to apply to your debt. But then what? You'd still have $100k of debt, with no change in your income situation. You would be sacrificing half of your retirement fund to reduce your debt by only a third.

Two points from your question are notable. First, you say your current job makes you eligible for loan forgiveness. Second, you say you love what you do. Given that, it sounds like it's likely you'll remain in your current job long enough to have your loan forgiven. I would see this as a major reason to stick it out until that time. It won't be painful from a work perspective, since you like the work (in contrast to someone who grinds through a job they dislike just to have their loan forgiven), but only from a budget perspective. Also, since your income is less than $75k, you may be able to deduct the interest on a student loan payment on your taxes (see Publication 970), softening the blow somewhat.

According to your numbers, your loan payment is a bit over 10% of your income. That is not pleasant, but it doesn't seem out of the question that you could make it work through judicious budgeting. It would depend on other aspects of your lifestyle and expenses (which you don't mention in the question, and which might go in a separate question if you start wondering how to do that budgeting).

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+1 - The good news? SL interest is not an itemized deduction, it's available even to standard deductioners. The bad news? Limited to $2500/yr. OP is probably just in the 25% bracket, so a $625 benefit. I hope OP knows this, and has been taking advantage. –  JoeTaxpayer Aug 4 at 11:16
    
As @JoeTaxpayer says, I can deduct (or is it a credit?) some-to-all of the student loan interest I pay on both my and my wife's loans every year, and I'm not in the income bracket you mention. –  warren Aug 7 at 19:53

I can see why you are feeling financial stress. If I understand right you have put yourself in a very uncomfortable and unsustainable situation and one that should indeed be very stressful for a person of your age. I feel a lot of stress just reading over your question.

I'm going to be very frank. Your financial situation suggests that you have very aggressively taken wealth from your future self in order to consume and to make inefficient investments. Well, look in the mirror and say to yourself "I am now my future self and it is time to pay for my past decisions." Don't take money out of your IRA. That would be continuing the behavior as it is a very inefficient use of your resources that will lead to yet more extreme poverty down the line.

Ok, you can't take back what you have done in the past. What to do now? Major life restructuring. If I were you, I'd sell my house if I had one. Move in with one of your kids if you have any nearby. If not, move into the cheapest trailer you can find. Take a second job. Very seriously look to see if you can get a job that pays more for your primary job--I know you love your current job but you simply cannot continue as you are now. Start eating really cheap food and buying clothes at thrift stores. Throw everything you can at your debts, starting with the ones with the highest interest rate. Plan now to continue working long after your peers have retired.

Early in life is the time to be borrowing. Middle age is when you should be finishing paying off any remaining debts and tucking away like crazy for retirement. Now is not an OK time to be taking on additional debt to fund consumption.

I know changing your life is going to be very uncomfortable, but I think you will find that there is more peace of mind in having some amount of financial security (which for you will require a LOT of changes) than in borrowing ever more to fund a lifestyle you cannot sustain.

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Cannot recommend this answer enough. Cutting expenses, making more money and aggressively paying off the debt (which means extra payments beyond the "required" amount and having them applied to principal) appears to be the only sane way to get out of this. –  Jayraj Aug 4 at 18:29
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The idea of this answer is good, but I think specific recommendations (e.g., "buy all your clothes at thrift stores") are a bit premature. The question says almost nothing about the OP's overall expense situation. There may be fat to cut without cutting so close to the bone (e.g., if she is eating out at fancy restaurants once a week). –  BrenBarn Aug 5 at 5:20
    
Fair enough. I just wanted to make sure she understood that she is desperately poor and get the idea across that she should make her lifestyle match her situation. –  farnsy Aug 5 at 13:58
    
@farnsy you're assuming she is "desperately poor" - there's nothing in the question to indicate that –  warren Aug 7 at 19:54
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@warren, I'm going to have to disagree. She is 47 with 140K in student loans and only about that much saved for retirement. She is hoping for debt forgiveness. She implies that she is spending more than she is making each month. And she is considering emptying her IRA to cope with the enormous financial stress she is feeling. Desperately poor is a relative term and she may not consider herself so, but I do. –  farnsy Aug 7 at 21:36

It would probably never make sense to do that. Why would you? You'll end up in the bankruptcy court either way, since you won't be able to pay off the loan, and you cannot maintain the monthly payments without getting into more debt.

IRA is shielded from bankruptcies, in most States, so it will probably stay with you afterwards. In any case - it will provide you some income when you're old and cannot keep up working. Unfortunately, Federal student loans are also shielded, but the rest of you debt - isn't.

I suggest trying to fix your budgets and see how you can improve your earnings to be able to maintain your payments. I can't understand how you could have racked up $140K student debt and have a career at which you earn $55K/year for an experienced employee.

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+1, but doesn't "probably never" = "rarely"? I'm surprised you didn't tackle the math of 9 years until loan forgiveness. She didn't offer the full details of this, but since she's paying less than interest accruing, that's what I'd look at. –  JoeTaxpayer Aug 4 at 11:02
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My favorite part in your post "IRA is shielded from bankruptcies" –  Mark Monforti Aug 4 at 11:57
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Bankruptcy court is a bad example when that court system does not diffuse college loans. Sorry for the downvote but college loans are a 1 in a 100 shot in bankruptcy court. And if I were going to lose things in court I loved I would use the IRAs. –  blankip Aug 4 at 13:43
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Speculation on the how part: One or more mailed attempts to get a degree before success. Went to school for a first BA/BS at an expensive school but was unable to use it to get a job and then went back to school for a second degree that was employable but not particularly high paying. Got a law degree but was unable to get a job as a lawyer. –  Dan Neely Aug 4 at 13:58
    
@blankip bankruptcy court won't diffuse student loans, but my point was that it also won't diffuse the IRA. The debt accumulated while paying the student loans will be diffused by the bankruptcies. It wasn't an example. At the rate the OP is describing to be going he will get to the bankruptcy court. –  littleadv Aug 4 at 17:05

Doing what you suggest may actually be helpful.

Today, you have wealth of 145k and debt of 140k, for net wealth of 5k. Your interest incurred is $671/month and your interest earned is $211, for a total loss of $460/month, just below the 491 $/month you are saving, so your total saving is $31/month currently.

However, even though in total, you have more money each month than the month before, you are getting more debt and thus more interest to pay each month. Your interest earned is increasing much slower.

That $31/month you are currently able to save? By the time you hit 51, that has become $0/month and is still dropping. By 60? Your debt has overtaken your retirement savings - that $5 net worth you have now is gone.

If you were to withdraw money from your retirement to pay off your debt (with the $32k penalties) you would have wealth of 70k and debt of 97k, for a net wealth of -27k (i.e. net debt).

Obviously, the above is not good. However, you reduce your monthly interest paid to $465, while also reducing your interest earned to $102. This is a total loss of $365/month, so you are saving $126/month.

Note that in this case, your $491 monthly repayment is higher than the interest you have to pay on the account, this means that each month, your interest payment becomes lower, thus you pay off more and more each month.

Your balance would be getting better each month (and at a faster rate each month. Your net wealth would be back in positives and above your wealth on your current trajectory before you hit 62.

By 65, you will have $9000 of net wealth if you use your retirement savings now, as opposed to $9000 net debt if you don't.

And just adding a few things on to the end

1) This is just the maths of it, and does not take into account your behaviour. If having that debt accruing is helping to motivate you to give up on luxuries, then this analysis does not apply. I am assuming that the $491/month is literally all you can save, and that no matter what changes, you will always deposit that $491. If you do not think you can continue to deposit that $491 if you stop seeing such high interest accruing, then do not do this.

2) I am assuming your interest earned on your IRA is 1.75%. If this is not the case, then please let me know, and I can adjust my numbers accordingly. From http://www.usatoday.com/story/news/politics/2014/01/28/obama-state-of-the-union-myra-savings-plan/4992743/

3) I'm assuming all numbers you mentioned are accurate, and will stay constant (interest rates may not)

4) This is not professional, financial advice. I am just a person on the internet.

5) This goes without saying (and will probably go down as well as "let them eat cake" did), but saving more money each month will be a more powerful, risk free way to get out of this problem. Work a 2nd job, cut costs however you can.

6) Sorry if you were looking for something more motivational or sugar coated.

7) Best of luck, feel free to ask any questions.

Graph below in red is your current trajectory, and blue is if you withdraw from your retirement to pay off your debt.

enter image description here

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Why do you assume the IRA is not invested in stocks, a long term 8% or so? And where do you account for the debt forgiveness that will occur in 9 years? –  JoeTaxpayer Aug 5 at 2:34
    
"Rates: Savers will earn interest at the same variable interest rate as the federal employees' Thrift Savings Plan (TSP) Government Securities Investment Fund. The fund earned 1.74% last year." - The URL I originally linked. I did not use 8% for the same reason why I didn't factor in winning the lottery every year. –  Scott Aug 5 at 2:54
    
As for debt forgiveness, I'll admit I am missing that - it's not something I'd ever heard of before. If the debt will rely be forgiven 100% in 9 years, then why bother discussing how to pay it back? The answer is to pay back the legal minimum and have it forgiven in 9 years, clearly. Are you sure the OP is eligible for this? –  Scott Aug 5 at 2:54
    
"I won't be eligible for loan forgiveness until the year 2023" - although I'm not 100% clear what, exactly, this means. Is it a full forgiveness? Partial reduction over time? OP might clarify. As far as the lottery is concerned, I've seen a CAGR of 11.32% from 1985-2013. This included 3 crashes, 2 of which were in one decade. I figured 8% was a conservative number. but I'll respect your rate of return that's a bit lower than inflation. –  JoeTaxpayer Aug 5 at 2:56
    
Oh yeah, forget about that line. I've added a comment asking about the loan forgiveness. Not sure if we can say anything until we know how much gets automatically repaid. –  Scott Aug 5 at 3:03

maybe everyone who has responded needs to look closer at the income base repayment plan for student loans. What this means is he payment does not even cover his interest rate so each month he makes his payment the loan grows, does not decrease. This is not a simple interest loan which is irritating because car dealerships do not even use a non-simple interest loan any longer. So, well your suggestions are well intended what is your suggestion now knowing that his monthly payments is not reducing his loan but actually his loan is growing exponentially each month. I also like the comment where the average student loan is $30,000, I would like to know in what state that is. That may work for a community college or a student who is reliant on parents to supplement their income so they can go to classes, however for someone who is working and going to school that person must opt out for night classes and online classes which definitely increases the cost of your classes. Right now the cost per credit hour is in the $550- 585 range.

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Do you understand the real issue here? You incurred a way above average expense in exchange for a mediocre income at a time where you should be preparing for retirement.

Your income is right in line with the national average, which is not really a problem if your expenses are low and you can live frugally.

Your student loans, are extra ordinary. Typical student loan debt is like $30,000. You have more like a loan for someone who went to Vet/Pharmacy school where large incomes are earned. Your amount of student loan indebtedness is similar to what people owe on their homes.

At 47, most people, IMO, should be figuring out how to clean up their last bit of debt so they can take advantage of the catch up contributions to their retirement.

IMO, you have one solution: Work like a dog and get that income up. There is only one way to move this mountain of debt you have and that is one shovelful at a time. You might have to change careers, for a time being, so you can get this paid off. You don't really have the luxury of doing what you love right now. Once it is cleaned up, then you can move back into doing what you love.

Good luck to you.

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Does your current employer offer a 401(k)? Can you roll your IRA into that? You can borrow from a 401(k). If you leave your job, get fired etc., you have to pay back the loan but you can avoid the early withdrawal penalty at least; there may also be less of a tax issue since it is a loan and may not be considered income unless you don't pay it back. The terms for taking a loan are set by the 401(k) plan documents. If you explore this route make sure you see the plan document itself. Don't rely on what someone tells you.

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Maximum 401K loan value is $50,000 –  mhoran_psprep Aug 4 at 16:28
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Welcome to Money.SE. I don't see how the 401(k) loan would help matters. In my opinion, it can only make the situation worse. –  JoeTaxpayer Aug 4 at 16:36
    
@JoeTaxpayer: It would only make sense if the new student loan payment plus the 401k loan payback were less. I doubt it would be since many 401k loans only go up to 5 years unless you are using it for house and I have seen 10 year loans. So OP could payoff at least $50k faster if OP has the money to do so. –  staticx Aug 4 at 22:08

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