Student loan debt expires

Should I Use IRA Money to Pay Back My Student Loans?

Doing what you suggest can actually help.

Today you have a net worth of 145,000 and a debt of 140,000 with a net worth of 5,000. Your interest is \$ 671 / month and your interest is \$ 211, which is a total loss of \$ 460 / month, just below the \$ 491 / month you save. Your total saving is currently \$ 31 / month.

Although you have more money each month overall than the previous month, each month you get more debt and therefore more interest. Your earned interest increases much more slowly.

The \$ 31 / month you can currently save? When you hit 51, that's \$ 0 / month and it's still falling. At 60? Your debt has overtaken your retirement plan - the \$ 5 net worth you now have is gone.

If you were to withdraw money from your retirement to pay off your debt (with the penalties of \$ 32,000) you would have a net worth of \$ 70,000 and a debt of 97,000, with a net worth of -27,000 (i.e. net debt).

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

Note that in this case, your monthly repayment of \$ 491 will be more than the interest you will have to pay on the account. This means that your interest payment will get lower every month and therefore you will be paying out more and more every month.

Your account balance would improve month by month (and faster each month. Your net worth would be positive again at your current rate and above your net worth before you hit 62.

At 65, you have \$ 9,000 net worth using your retirement savings now, versus \$ 9,000 net debt if you don't.

And add a few more things at the end

1) This is just the math and doesn't take into account your behavior. If this debt is helping you forego luxury, this analysis does not apply. I'm assuming the \$ 491 / month is literally all there is to save and that no matter the changes, you'll always be depositing that \$ 491. If you don't think that you can keep depositing that \$ 491 once you don't see such high interest rates, don't.

2) I am assuming that your interest on your IRA is 1.75%. If not, 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 am assuming that all of the numbers you have given are correct and will remain constant (interest rates may not).

4) This is not professional financial advice. I am only one person on the internet.

5) This goes without saying (and will likely go down as much as let them eat cake), but saving more money each month is a more powerful, risk-free way to solve this problem.Do a second job, cut costs as much as you can.

6) Sorry if you're looking for something more motivating or sugar-coated.

7) Good luck, don't hesitate to ask questions.

The graph below in red shows your current trajectory and blue as you retire from your retirement to pay off your debts.

JoeTaxpayer ♦

Why do you assume the IRA isn't invested in stocks, 8% or so in the long run? And where do you explain the debt relief that will take place in 9 years?

Scott

"Interest rates: Savers receive interest at the same floating rate as the Government Securities Investment Fund of the Federal Employees Savings Plan (TSP). The fund earned 1.74% last year." - The URL I originally linked to. I didn't use 8% for the same reason I didn't take into account the lottery win every year.

Scott

As for debt relief, I admit I miss it - I'd never heard of it before. If the debt is 100% canceled in 9 years, why discuss how it can be repaid? The answer is to repay the legal minimum and have it clearly awarded in 9 years. Are you sure that the operating room is authorized to do so?

JoeTaxpayer ♦

"I will not be eligible for credit until 2023" - although I am not 100% clear what exactly this means. Is it full forgiveness? Partial reduction over time? OP could clarify. Regarding the lottery, I saw a CAGR of 11.32% from 1985 to 2013. This included 3 crashes, 2 of which were in a decade. I thought 8% was a conservative number. But I will respect your rate of return which is a little lower than inflation.

Scott

Oh yes, forget that line. I added a comment that asks for credit approval. I'm not sure we can say anything until we know how much will be paid back automatically.