Chances are, the trillion-dollar student debt bubble isn’t going to disappear overnight. In fact, today’s 20-somethings can expect to carry as much as $80,000 in student loan debt by the time they hit their thirties. At that point, consumers might be desperate enough about meeting their monthly loan payments that they’ll be tempted to tap into their Individual Retirement Account.
There’s only one way to do that without incurring any penalties, which Forbes.com contributor Erik Carter notes:
“If you have IRAs (or previous employer plans that can be rolled into an IRA), this may be your best bet.That’s because IRAs can be used for higher education expenses penalty-free and don’t need to be paid back.You may still have to pay taxes on the withdrawal but if you take the withdrawal in a year that you reduce your work hours, you could end up paying little or no taxes on it since you’ll likely be in a lower tax bracket. (Roth contributions can be withdrawn tax-free for any purpose, including education expenses.”
Before you start eyeing your nest egg, however, ask yourself a couple of questions first:
1. Can you afford the hit to your investments? Bukszpan estimates the majority of investors see 6 per cent returns over time, which is less than the interest accrued by federal unsubsidized student loans (6.8 per cent). If that’s the case, then you’d be paying more in loan interest than you’d stand to gain on your investments. Dipping into your IRA might make sense in that case. But keep this in mind: Some federal subsidized student loans have interest rates as low as 3.4 per cent.
2. How long until you retire? It’s no secret Americans are having a harder time than ever funding their retirement accounts. Before deciding to withdraw from your retirement plan, be sure to review your retirement goals and the progress you have made towards those goals. Interest rates are relatively low compared to other forms of debt and they can often be written off on your taxes.