Dave Ramsey: Don’t Cash Out Your 401(k) To Pay Student Loans — Do This Instead
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Josephine Nesbit
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Nicholas Morine
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Struggling to pay off your student loan debt? Cashing out your 401(k) to pay off your student loans may be tempting, but Dave Ramsey says it’s a bad idea. Instead, the personal finance expert recommends that you “go berserk” on your student loan payments to pay it off as quickly as possible.
Student loan debt is one of the heaviest burdens for graduates and their families. According to the College Board, the average student loan debt for bachelor’s degree recipients was $29,400 for the 2021-2022 school year, CNN Underscored reported. Among all borrowers, the average balance is $38,290, according to 2023 data from Experian.
Cashing Out a 401(k) Early Comes With a Big Penalty
You can cash out a 401(k) to pay off debt, but an early withdrawal comes with big penalties. Retirement accounts are designed to help people save for retirement. To incentivize people to save, the IRS offers tax benefits for contributions and penalizes early distributions to discourage the use of funds for purposes other than normal retirement. If you take out money before the age of 59½ and don’t qualify for certain exceptions, the IRS imposes a 10% penalty on the amount withdrawn. That’s not even counting the loss of employer-vested funds provided there is a vesting schedule in place and full eligibility has not been achieved, nor the fact that early withdrawals are treated as taxable income.
You can pay off student loan debt quickly without dipping into your retirement funds, but it involves making some major changes to your life. Ramsey said if he were in that situation, he wouldn’t go out to eat or go on vacation — he’d pick up extra jobs and sell anything he could to pay off his debt.
According to a blog post on his website, Ramsey Solutions, the fastest way to pay off student loans is to pay more than the minimum payment. Smaller payments will keep you in debt longer, and your balance will grow if your payment doesn’t even cover interest.
“I would roll up my sleeves and attack it with an absolute vengeance,” Ramsey said on an episode of “The Ramsey Show” when discussing why you shouldn’t cash out your 401(k) to pay student loan debt. “I have found in 30 years of doing this that the faster you get out, the more likely you are to get out.”
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