What is the best way to pay off graduate school debt using my 401(k)?

I have grad school debt that I'm trying to pay off as soon as possible. I have savings in my 401(k) and I am trying to determine the best way to use these funds to help pay off my education loans. What would be the most tax efficient way of doing so? Should I roll over my 401(k) to an IRA? Is it possible to avoid paying the 10% penalty and taxes?

College Tuition, Debt, IRAs, Taxes
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November 2017

Swanger, Rose

Knoxville, TN


The best way to pay off your student loan debts is to use your earned income and leave the 401k or any other retirement account alone. It’s not worth of paying any extra 10% penalty on top of your current tax to eliminate the loan debts. I understand your fear, frustration, and urgency to pay down the loan as soon as possible as I work with many doctors who are freshly out of residency or fellowship programs, and the average loan size is about $250k. So, I give you the same advice as I give to all those doctors—not only I want you to fund your retirement accounts to the maximum but also aggressively pay down the student loan. You may say, “Lady, that’s impossible. You don’t know my situation.” I may not know your personal situation, but I do know the purpose to obtain that graduate degree is for a better future and bigger pay off for you and your family. The key is not to be carried away by the higher pay as we all tend to morph into a higher life style that our income brings us.

First thing first, develop your budget and have the determination that you can do this. Know your fixed expenses (tax, food, shelter, clothing, insurance, etc.) and work on your variable expenses (entertainment, dining out, travel, and so on). You may have no control for your fixed expense, but you are definitely in control of any variable expenses. Continue to live on the old or a beginner’s salary so than any raise can be used towards the student loan principal. Make sure you write on the cover letter that any extra is used for the principal payment, not the next or future payment. Secondly, shopping around to refinance your student loan on the private market (SoFi, Discover, CommonBond). You will be amazed to see what a good credit score can do, a much lower interest rate, which directly translates to a lower payment and extra pays towards the principal. Lastly, set at least 10% of your salary towards your 401k. If you can’t do 10% now, who do you think will bail you out during the retirement? You can fund the education with a loan, but you can’t fund a retirement with the borrowed money.

Hope those simple tips help you achieve your goals. Best!

November 2017
November 2017
November 2017
November 2017