401k Assets To Pay Student Loans?

Student debt is a legitimate obstacle, what's the best way to tackle it?

Rand Paul has a plan to help people pay off their student loans with limited access to 401k or IRA assets. You don't need me to tell you that due to the exorbitant increases in tuition, many people are choking on their student loans, this problem also encompasses people in their 60's who've helped family members go to school. The plan in its current form would limit withdrawals to $5250 per year. My guess is that if this ever comes to be, it will look much different than the initial draft so for this post I will zoom out a little bit.

Pretending for a minute there were no limits to how much could be taken from a retirement account to pay for student debt, if someone had $100,000 in their 401k and owed $100,000 in student debt, I would not empty out my account to zero out my debt. I did something like that once with my first large paycheck out of college and the credit card debt I'd accumulated while in college. The numbers were very small but the short period of essentially no money and no debt was not ideal. I am not saying it is wrong, just sharing a personal anecdote and my sentiment after the fact.

If it ever comes to be that you could access qualified assets to pay down, as opposed to pay off, student debt, then in terms of dollars and cents, it would make sense to do because you were able to get the tax deduction going in and can then access it without paying tax coming out.

While there is no way to know whether Paul's plan will ever come to pass so maybe a good question is whether or not younger workers should pay down debt at the expense of saving for retirement or figure out some sort of balance and what that balance might be.

Obviously there will be some sort of minimum payment for student debt and for anyone caring about maintaining their credit rating (a form of optionality) they will have to pay it. In the typical 401k plan some amount of the employee contribution is matched by the employer along the lines of 50 cents on the dollar for the first 5% contributed (that's just an example, there are many permutations). You are turning down free money if you don't contribute enough to get the full benefit of the employer match. There is no such dynamic with IRA accounts. Anyone with access to an employer match should take advantage of that...

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