How to get out of student loan debt.

Getty Images/iStockphoto

Question: I graduated in 2000 with about $35,000 in student debt. My wife also had about $20,000 in student loan debt. These were mostly federal loans with a small amount of private loans. We were struggling right out of school (she’s a teacher) and couldn’t afford to pay, so the loan counselors (private lenders) told us to consolidate with a private lender and that would be the best way to repay them. We had to defer payment for a few years, then we started paying. Of course, accrued interest, which we understand.

But, here we are now, 22 years later, with our loan having been sold two or three times among lenders, our payment about $100 more per month, with the same outstanding balance that we started with. We make our minimum payments each month. Now our eldest is in college and we are still paying our own student loans. I have two questions. 1) Is there hope for private lending that used to be federal where we were led to believe that was a good option? 2) Should I just pay this with my 401(k) and cash in to get rid of this debt? I am about 20 until retirement. I would like to know if my plan for using my 401(k) has some support among advisors.

To respond: In response to your first question, “Once a federal loan is refinanced into a private student loan, there’s no turning back,” says Mark Kantrowitz, student loan expert and author of Who graduated from college? Who doesn’t?. What he means is that you can’t convert private loans back to federal loans, and private loans don’t have the same benefits as federal loans. “Refinancing federal loans into a private loan causes you to lose the superior repayment benefits of federal loans, such as longer deferrals and forbearances, income-based repayment plans, loan forgiveness options, and various waivers. “, he explains. But since your loans are already private and the interest rate is quite high, refinancing may be a good option for you (see the lowest refinance rates you could qualify for here). “Refinance rates for good credit are certainly lower than they were 10 or even 5 years ago. You may be able to pay off loans faster with a lower rate,” says Anna Helhoski, student loan expert at NerdWallet.

Have a question about getting out of a student loan or other debt? E-mail ch[email protected]

In response to your second question, the pros say to avoid using your 401(k) to pay off your student loans because withdrawing early could cost you dearly in taxes and penalties. If you’re under 59½, you could automatically lose, say, 20% of your 401(k) withdrawal to taxes plus a 10% early withdrawal penalty from the IRS when you file your tax return. income. to return to. A 401(k) loan could also be risky: “If you borrow money from the 401(k) instead of taking a distribution, the 401(k) loan must be repaid within five years — sooner if you switch employer-matched — and you may not be able to re-contribute or benefit from employer matching on contributions until the loan is repaid,” Kantrowitz explains.

All of this, unfortunately, can leave you stuck with your student loan bill. The pros say to tackle it fast. Work to get the lowest interest rates and best terms possible for your private loans (see the lowest refinance rates you might qualify for here). “The more you pay each month, the faster you pay off the debt and the less interest you’ll pay over the life of the loan,” Kantrowitz says. “If the loans have different interest rates, try to target the loan with the highest interest rate for faster repayment, as this will save you the most money,” Kantrowitz says, though, of course, always pay the minimum on all debts.