Investments

Senator: Pay Off Your Student Loans With Your 401k

Senator Rand Paul (R-KY) wants you to pay for your student loans with your 401k.

Here’s what you need to know.

Student Loans: Proposal

How would you like to pay for college or pay off student loans with pre-tax money in your retirement account? If that sounds like an attractive idea, then Paul’s new legislative proposal, the HELPER Act (Higher Education Loan Payment and Enhanced Retirement), has got you covered.

The HELPER Act would allow:

  • Tax-Free Money For College: The ability to withdraw (tax-free and penalty-free) up to $5,250 from your 401(k) or IRA annually to pay for college or to pay off student loan debt.
  • Pay For Dependents: The ability to pay tuition and expenses for a dependent or a spouse.
  • Tax-Free Employer-Sponsored Plans: Employer-sponsored student loan and tuition plans would become tax-free up to $5,250 annually.
  • No Cap on Student Loan Interest Deduction: The legislation would remove the cap and phase out the student loan interest deduction.
  • Create Incentive To Save For Retirement: One goal is to encourage more investment in 401k’s, which can then be used to repay student loan debt. Employees also could opt to receive employer contributions as after-tax Roth contributions (rather than pre-tax), meaning employees would not owe taxes in retirement on the employer contributions.

Paul seeks to reshape the way people save and pay for higher education, driven through tax and savings incentives. Paul notes that current student loan interest rates can be as high as 7% for graduate students and parent borrowers, which creates a financial burden. However, student loan refinancing rates have dropped to below 2%.

Paul’s proposal would enable borrowers to pay off student loans with at least some pre-tax money. Currently, borrowers pay off student loans with after-tax money.

“Instead of empowering the federal government to increase its involvement in education, which will only raise costs even higher and further lower the value of our dollars to cover them, we can empower the American people to reduce the burden of debt, realize the dreams they studied hard to achieve, and grow their retirement savings,” Paul said.

The Drawbacks

Critics of Paul’s plan likely will note, among other objections, that:

  • removing money from a retirement account to pay off student loan debt – or any use that is not directly related to retirement – may not be a wise financial move;
  • many student loan borrowers cannot both save for retirement and pay off student loans, so often must choose one or the other;
  • the annual amount is a start, but may not be sufficient to help borrowers make a meaningful impact;

Student Loan Refinancing To Forgiveness

The latest student loan statistics show that more than 44 million Americans collectively owe more nearly $1.6 trillion of student loan debt. According to Make Lemonade, that makes student loan debt the second highest consumer debt category behind mortgages. Democratic presidential candidates have taken a different approach, proposing everything from simpler student loan refinancing and student loan consolidation to student loan repayment and student loan forgiveness. Senator Bernie Sanders (I-VT), for example, wants to forgive all $1.6 trillion of student loan debt, including both federal and private student loans.

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