Should I Use My 401(k) To Pay Off Student Loans? Pros and Cons

In an article discussing the pros and cons of using a 401(k) to pay off student loans, financial expert Anthony DeLuca shared valuable insights on managing student debt:

• The Avalanche and Snowball Methods: DeLuca suggested two popular strategies for tackling student loans. He explained, “I would suggest making consistent payments to the biggest interest rate loans, then working your way down. This is the avalanche method. The snowball method utilizes the opposite approach, tackling the smallest balances first. Either way, it's about staying consistent in your payments.” These strategies offer structured approaches for paying off debt efficiently.

  
  

In the article, it’s explained that while you can use your 401(k) to pay off student loans, doing so comes with significant risks. If you withdraw money before the age of 59 ½, you will face income taxes and a 10% penalty. Alternatively, a 401(k) loan allows you to borrow against your funds without penalties, but you must repay the loan on time, or it will be treated as an early withdrawal and incur penalties.

The article also covers alternatives to tapping into a 401(k) for student loan repayment, including employer repayment assistance programs, refinancing loans, and using income-driven repayment plans for federal loans. Additionally, some employers now match student loan payments under the SECURE 2.0 Act of 2022, allowing employees to reduce student debt while still contributing to retirement savings.

DeLuca’s advice on the debt repayment methods and the importance of consistency in tackling loans provides a useful framework for anyone struggling with student debt.