Student Loans vs. Retirement Savings

Sept. 1, 2009 — -- Excuse me if I'm repeating myself.

But the longer I write this column, the more I find common themes and issues among the questions readers pose to me. Favorite topics include retirement plan rules, Social Security, student loans and other forms of debt.

That tells me there are some issues I can never discuss enough and is the reason the questions and answers below may sound familiar if you read this column on a regular basis.

Looking for financial advice? Click here to send David your questions and they might end up as a topic for his next column.

Q: I am a 26-year-old female. I was laid off by my current employer. My 403(b) is still at the company and I am in the process of turning it over to a mutual fund at my bank. My question before I do this is: Will it benefit me to take the $7,000 I have saved in the retirement fund and pay a student loan that I have currently in repayment? I am trying to get the loans put on hold due to unemployment but it has been taking some time and I can no longer afford the monthly payments.

- A.C., Trumbull, Conn.

A: The short answer is no, A.C. Pulling the money from your retirement savings to pay down the student loan will not benefit you. In fact, it will cost you more than you could imagine.

The reason is the taxes and penalties you would pay on the $7,000 withdrawal from the 403(b) plan are likely to exceed the savings on interest charges you would realize by paying down the loan. By my calculation, that $7,000 withdrawal would likely cost $2,100 in taxes and penalties.