‘Can someone explain to me why taking an early 401(k) withdrawal would be a bad idea over taking student loans at a 7% interest rate?’: I blew my savings on grad school – should I liquidate my 401(k) or take out student loans?

Hi Money Minder,

Hey Money Minder,

So here’s the deal: I’m in grad school with just one more year to go, but I’ve already blown through all my savings covering tuition and rent. I have around $50k sitting in my 401(k) that I’m considering liquidating to pay for my final year. But then I’m wondering, why not just take out student loans at a 7% interest rate instead of dipping into my retirement fund? I mean, loans are pricey, but going into debt when I have the cash seems a bit off to me.

After I finish school, I’ll be going back to my old job where I’ll be making $200k. Any thoughts or advice on this dilemma? Thanks for your help, Money Minder!

Cheers,
The Confused Grad Student

Response from THE MONEY MINDER:

Thank you for reaching out. How can we assist you with your financial needs today?

Hello There,

Hello, and thank you for sharing your current situation with us. It’s great that you are proactive about finding a solution. It’s understandable to feel conflicted about taking out student loans when you have a significant amount in your 401(k). However, before making any decisions, let’s consider the implications of withdrawing from your 401(k) early.

Taking an early withdrawal from your 401(k) can have several drawbacks. Firstly, there are tax penalties associated with early withdrawals, which can significantly reduce the amount you receive. Additionally, you would be missing out on the potential growth of that money over time, which could impact your retirement savings in the long run.

In contrast, student loans, while they accrue interest, come with more flexible repayment options. You can defer payments until after you graduate, and there are also options for income-driven repayment plans based on your post-graduation income.

Given your planned return to a higher-paying job after completing your studies, it might be more financially prudent to take out student loans now and pay them off once you’re back in the workforce. This way, you can preserve your retirement savings and benefit from the potential growth over time.

In conclusion, while it may feel uncomfortable to take on student loans, it may be a more financially sound decision in the long term. Consider speaking with a financial advisor to explore all your options and make an informed choice. We wish you all the best in completing your grad school journey and returning to your career path.

Farewell from THE MONEY MINDER.