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Should I Use My Retirement Funds to Pay Off My Kids’ Student Loans?



I am a co-signer on some student loans for my kids. I’m retired but work a part-time job. Would it be better to continue paying on the student loans? Or take money from my retirement fund and pay off the student loans? Then the kids can pay me back.

The amount of the student loans is around $80,000. If I take money from the retirement fund, there is no early withdrawal penalty. I am two years away from being able to draw Social Security, so should I pay off the student loans or keep paying as is?

Tommy in the Marshall Islands

Howard Dvorkin CPA answers…

Before I answer your question, Tommy, I want to remind you and everyone else what it means to co-sign a loan. In five words, it means: Their loan is your loan.

In a lot more words, that means if your children stop making payments, you must. You’re legally responsible for whatever amount is left on the loan. The lender can sue you for the balance. Five years ago, a poll showed that the most common co-signers were older than 50, helping a child or stepchild.” That sounds like you fall into that category, Tommy. Here’s what else that poll showed: “38 percent of co-signers had to pay some or all of the loan or credit card bill because the primary borrower did not.”

I’m focusing on this first because it goes directly to your solution: Borrow from your retirement, pay off those student loans, “then the kids can pay me back.” It sounds like you’re paying some or all of those loans now. You need to ask yourself a tough question: If you sacrifice your retirement earnings – because withdrawing funds mean they aren’t there to keep growing – will your children be diligent about paying you back?

If you’re certain the answer is a resounding yes, then let’s consider your question by looking at the math.

Interest paid on debt versus interest gained on retirement investment

If your children have federal loans, their interest rate is probably around 3.5 percent.

(Rates are pegged to the 10-year Treasury note at the time you took out the loan. So if you took out a loan this year, your interest rate would lock in at 3.73 percent.)

Meanwhile, the average return on a Roth IRA is around 7 percent. Of course, I don’t know what kind of retirement fund you have, but it’s possible you’re earning more than those loans are costing. If that’s the case, you should think twice about borrowing against your retirement fund.

In essence, this is a numbers game. I realize there’s an emotional aspect here – as there usually is when it comes to money. You want to help your children. The best way to do that, however, is to ensure you don’t hurt yourself. Since you can legally draw half of your retirement account without penalty, I’m assuming you have at least $160,000 invested. That, of course, is nothing compared to the $750,000 or more that many experts recommend you have saved for retirement.

You also cite being two years from drawing Social Security. I presume you believe that this money will cover your retirement expenses, but it was never intended to do that. As the Social Security Agency says, “Social Security is part of the retirement plan for almost every American worker.” Emphasis mine.

Don’t draw from your retirement funds just yet

So, to be as specific as I can, I’d suggest holding off on this huge decision for the moment. Put pen to paper, and even if the numbers work in your favor – that is, you’ll save more paying off those loans than you’ll cost yourself in lost retirement earnings – still pause.

As the economy recovers, the investments within different retirement accounts – whether they be Roth IRAs or 401(k)s – will see gains. Meanwhile, your children’s student loans are locked in, so the interest they pay won’t fluctuate. So it might well be that drawing down your retirement account might cost you gains that are just on the horizon.

As you can see, your simple question has no simple answer. I’ve outlined the factors you need to consider. The rest is up to you.

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