Cash out 401k to pay off Sallie Mae??

[InNeedOfAdvice]

Hi,

I am in a big dilemma. I am 35 and have 3 Sallie Mae student loans. 2 are defaulted. Of the 2, 1 is at a balance of $15k. The other is at a balance of $20k.

I spent the majority of my 20's after gradating from college working jobs that paid in the high 20s and was always putting off on my loans. The last couple of years I have worked harder and finally gotten up to making a decent salary now of which is at $60k.

The problem is now I am probably about to get a judgement against me or sued. I know this because the time is running out for them to do so and the balances are so high. It is stressing me out thinking about how police may come to my job to serve my papers for student loan debt lawsuit. Unfortunately I have not been working enough to save a ton of money to settle off these charged off loans yet.

However I have $40k in my 401k. I know everyone might say this is the worst idea, but if I could cash out the fund to settle both remaining private loan, it would be huge relief for me. I don't want to do it but I have no other available funds.

Please advice

[BuckyBadger]

How did you get $40k in your 401k in 2 years? That would indicate that you are an EXCELLENT saver AND have a nice company match.

While you were saving all that money in your 401k, were you not considering paying off your debt? You probably should have contributed enough to your employer plan to get the match and thrown the rest at debt.

Or am I misunderstanding something here? It is extremely difficult to get $40k into a 401k in two years.

[bjl584]

How did you get $40k in your 401k in 2 years? That would indicate that you are an EXCELLENT saver AND have a nice company match.

While you were saving all that money in your 401k, were you not considering paying off your debt? You probably should have contributed enough to your employer plan to get the match and thrown the rest at debt.

Or am I misunderstanding something here? It is extremely difficult to get $40k into a 401k in two years.

I agree unless there is a piece of info that is missing.

I'd stop or back off on the 401K and start agressively paying back the loans.

[disneysteve]

First off, cashing out your 401k won't yield enough money to pay off the loans. You'll lose about 35-40% to taxes and penalties, so 40K will turn into 24-26K.

I also wonder why you were investing in your 401k rather than paying off your debt. Obviously it is too late to fix that but it sounds like this situation could have been avoided.

I wouldn't cash out the 401k due to the huge loss you'll sustain. I would immediately stop contributing and start putting every spare penny toward the debt repayment.

[jpg7n16]

However I have $40k in my 401k. I know everyone might say this is the worst idea, but if I could cash out the fund to settle both remaining private loan, it would be huge relief for me. I don't want to do it but I have no other available funds.

Please advice

Why don't you just call them and get on a repayment plan?

Nothing says you have to pay the balance in full, all at once. Even if they took you to court over it, all the court would do would be to set up a repayment plan.

So why not just avoid court and do that yourself?


What does your monthly budget look like now? Can you post your income & expenses?

[InNeedOfAdvice]

How did you get $40k in your 401k in 2 years? That would indicate that you are an EXCELLENT saver AND have a nice company match.

While you were saving all that money in your 401k, were you not considering paying off your debt? You probably should have contributed enough to your employer plan to get the match and thrown the rest at debt.

Or am I misunderstanding something here? It is extremely difficult to get $40k into a 401k in two years.

I started contributing to my 401 in my early/mid 20s becaus my grandfather told me always pay myself first and contribute the minimum no matter what.

That is about all I could save was towards my 401k for years...everything else went to bills.

[InNeedOfAdvice]

First off, cashing out your 401k won't yield enough money to pay off the loans. You'll lose about 35-40% to taxes and penalties, so 40K will turn into 24-26K.

I also wonder why you were investing in your 401k rather than paying off your debt. Obviously it is too late to fix that but it sounds like this situation could have been avoided.

I wouldn't cash out the 401k due to the huge loss you'll sustain. I would immediately stop contributing and start putting every spare penny toward the debt repayment.

I know it will be a huge loss but I figured I could settle the two loans if I pay them in a lump sum. My main motiviation is to be done with all of it. I have had bad credit for years now and I don't want to have it for 20 more years

[jpg7n16]

I started contributing to my 401 in my early/mid 20s becaus my grandfather told me always pay myself first and contribute the minimum no matter what.

Okay, and what did he tell you about why you pay yourself first?

That is about all I could save was towards my 401k for years...everything else went to bills.

If you can barely save the minimum in a 401k, pay the bills, and are unable to pay on your debts, you need to rework your bills.

It'd really help if you could post your monthly budget. We could do so much more to help you out.

I know it will be a huge loss but I figured I could settle the two loans if I pay them in a lump sum. My main motiviation is to be done with all of it. I have had bad credit for years now and I don't want to have it for 20 more years

If you get on a repayment schedule, that will benefit your credit more than if you cash out your 401k and settle the debt for less than you owe.

Debt settlements are very negative items on your credit score.

Why would you cash out and lose huge penalties on the benefit your grandfather taught you to build?

------------------

I can see this conversation happening:

"Granddad, remember when you told me to pay myself first so I could build a good nestegg for my future?"
-Sure do. It's good advice!
"So, I took your advice and I've been doing that since I was 20. So far I've built up $40k."
-That's great! You're off to a wonderful start.
"Well what I'd like to do now is cash it all out, paying nearly half in taxes and penalties, so that I can settle my school loans I couldn't work into my budget."

What would he say next?

[InNeedOfAdvice]

Okay, and what did he tell you about why you pay yourself first?

To secure my future and because I was young, so time was in my favor in regards to taking advantage of the whole compounding factor thing.

I can see this conversation happening:

"Granddad, remember when you told me to pay myself first so I could build a good nestegg for my future?"
-Sure do. It's good advice!
"So, I took your advice and I've been doing that since I was 20. So far I've built up $40k."
-That's great! You're off to a wonderful start.
"Well what I'd like to do now is cash it all out, paying nearly half in taxes and penalties, so that I can settle my school loans I couldn't work into my budget."

What would he say next?

Probably something to the effect of:

"Don't rob yourself of your financial future trying to make up for past financial mistakes in hurry. You didn't get in debt overnight and you won't get out of it overnight"

[Ramose]

"Don't rob yourself of your financial future trying to make up for past financial mistakes in hurry. You didn't get in debt overnight and you won't get out of it overnight"

Exactly. Set up a payment plan with the debt providers and pay it slowly.

Post your budget for better information. If you don't have one then just list estimates for now.

[snafu]

In Need of Advice: You've been given advice which explain why your desire to cash out your 401K, pay income tax and penalties are not in your interest. Your procrastination in making arrangements with the lender has led to a poor credit rating and fear of being embarrassed at work. I wonder if they will garnishee pay and put you in an even more difficult spot.

You will likely benefit from outlining where you are spending and how Student Loan payments could be carved out from the folks here who are knowledgeable and wish to see you succeed.

[InNeedOfAdvice]

Here is rough estimate of my bills.

I bring in about $3400 net after taxes, insurance, 401k. etc.

emergency fund 300 (balance: $1000)
graduate classes 700 (saving to start fall 2013)
eating out 100
rent 900
cell 100
other (clothing, hair, gifts, etc.) 100
transportation 100 (no car, this is for public transit)
student loans 600 (this is for the one loan I pay on that's note in default; balance: $10k)
groceries/toiletries 400
utilities 100
total 3400

[bjl584]

graduate classes 700 (saving to start fall 2013)

This sticks out. What are you going to grad school for? What are your employment prospects? Are you planning on racking up more debt for this endevor, or are you paying totally out of pocket? I would advise you to hold off on grad school until you get your undergrad school loan mess under control.

[BuckyBadger]

I bring in about $3400 net after taxes, insurance, 401k. etc.

And how much is going into your 401k?

[InNeedOfAdvice]

This sticks out. What are you going to grad school for? What are your employment prospects? Are you planning on racking up more debt for this endevor, or are you paying totally out of pocket? I would advise you to hold off on grad school until you get your undergrad school loan mess under control.

MBA. I was going to attend part time; my employers pays for the majority and then I was going to pay the remaining out of pocket.