Dave Ramsey: Avoid Cashing Out Your 401(k) for Student Loan Payments — Try This Alternative

If you’re having trouble paying off your student loans, you might think about cashing out your 401(k). However, financial expert Dave Ramsey advises against this. Instead, he suggests aggressively tackling your student loan payments to eliminate the debt as quickly as possible.

Student loan debt is a significant burden for many graduates and their families. For the 2021-2022 school year, the average student loan debt for bachelor’s degree recipients was $29,400. Across all borrowers, the average balance is $38,290 as of 2023.

Cashing out a 401(k) early can lead to substantial penalties. These retirement accounts are meant to help people save for their future, and the IRS offers tax benefits to encourage this. If you withdraw funds before age 59½ without qualifying for certain exceptions, you’ll face a 10% penalty on the amount withdrawn. Additionally, you could lose employer-vested funds if you haven’t met the vesting schedule, and the withdrawal will be considered taxable income.

You can pay off student loan debt quickly without using your retirement funds, but it requires significant lifestyle changes. Ramsey suggests cutting out dining out, vacations, and picking up extra jobs or selling items to pay off the debt.

According to 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 if your payment doesn’t cover the interest, your balance will grow.

Ramsey emphasizes the importance of attacking the debt with determination. He believes that the quicker you pay off your debt, the more likely you are to succeed in becoming debt-free.