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Paying off Parent plus loans with 457B funds?
Old 01-10-2018, 06:22 PM   #1
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Paying off Parent plus loans with 457B funds?

I am a 50 year old public employee who is retiring within the next year. I will soon begin paying off the parent plus loans that I took out for my three children's college education. I owe approximately $200,000 at an average 7% interest rate with a repayment plan of 30 years. As I will be retiring, I will have access to my 457b funds once I separate from service. I have $200,000 in a stable value fund earning a guaranteed 4%.

Ideally, I would like to withdraw $200,000 from my 457b plan and pay off the $200,000 in parent plus loans. Obviously, the tax burden withdrawing and paying taxes on $200 grand is of great concern to me and may be financially unwise and unrealistic.

The $200,000 in my 457b plan represents a little more than 20% of my retirement portfolio. My wife will continue to work for a few more years before retiring with a pension as will I.

I would appreciate any advice and ideas on how best to address my situation. Thank you.
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Old 01-10-2018, 07:48 PM   #2
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I find this scenario very weird. There's a lot of missing numbers, but I find it hard to see any version of this whole scenario that could make sense.
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Old 01-10-2018, 08:41 PM   #3
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No, minimize the tax consequences by paying them off over the 30 years (or letting your estate worry about it)

There could always be a future opportunity to re-finance at a lower interest rate (HELOC?).
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Old 01-10-2018, 09:19 PM   #4
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you leveraged what amounts to 1/4 of your future 40+ years of retirement, for your kids tuition?

I would make my kids pay me back + 8% interest. That way at LEAST they learn a partial lesson on inflation. If any lesson.

I don't even know if I would co-sign for a car loan... I do have kids maybe my mindset will change as they age, for now we do 529 college savings and are not planning on sacrificing our own retirement for them to earn degrees etc.

*hopefully they will thank me when they receive a large inheritance, or I die with nothing, who knows.

Also, why a stable value at 4%? Yeah raising the white flag on this one, I'm confused.
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Old 01-10-2018, 10:27 PM   #5
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Not familiar with a 457b plan but I'm assuming any withdrawal is ordinary income. So, as you indicated, the tax burden is significant. One way to pay this (as has been said) is to pay back the loan as scheduled, or at least over a period of time in order to minimize the taxes. Drawing out enough to keep yourself under the highest tax brackets would be the goal. However, if your pensions and other money already have you at the higher tax bracket, then it may not matter. It doesn't matter that you need this money to pay off a college loan, this is a common problem for people, like myself, that have saved a high percentage of their retirement wealth in tax deferred accounts. Any withdrawal process needs to consider how the taxes will be paid. Minimizing the annual withdrawal in consideration of the applicable tax brackets is the only option I've come to understand.
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Old 01-11-2018, 09:21 AM   #6
Confused about dryer sheets
 
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I guess the way I'd analyze it would be to just compare the total cost of the two strategies (pay all now vs pay in installments).

Back of the envelope, if you pull the 200K you'll pay taxes on all of it now, but you won't pay interest on the loan. If you can stay in the new 24% bracket you'll pay 48K in taxes, but you won't have to pay any additional interest on the loan. Total cost on this option is 48K.

If you pull the 200K over 10 years and can stay in 12%, you'll pay 24K in taxes. You'll also pay 27K in interest in the first two years. 24+27 > 48 plus additional interest over the remaining 8 years makes this choice clearly more expensive.

These numbers are just to illustrate the thought process I'd probably use. My numbers were pulled out of a hat not knowing your tax situation, whether the interest is deductible, etc. You also need to account for returns on the 200K if you leave it in over 10yrs--that's a reduction in the total cost. You'll have to plug in your details and work out the numbers.

Your 200K in tax deferred isn't enough to retire the loan. You'll also need other money to apply to the problem--or work out the cost of the two options assuming some residual loan balance.
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Old 01-11-2018, 10:05 AM   #7
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Just a follow up. I plugged the two choices I mentioned into a spreadsheet because I was curious how different they were. Assumed all interest/payments happened at the end of each year.

Pay it over 10 years, assuming 12% tax and 4% returns. Total cost (tax+interest) at the end of 10 years is $146K and your loan balance is still $96K

Pay it all at once, assuming 24% tax. Total cost (tax+interest) is $64K and your loan balance is $56K.

Paying interest hurts!
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Old 01-11-2018, 10:32 AM   #8
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Quote:
Originally Posted by kgtest View Post
you leveraged what amounts to 1/4 of your future 40+ years of retirement, for your kids' tuition?

I would make my kids pay me back + 8% interest.
I wouldn't go that far but I would look into asking the kids to contribute to the loan payments to the extent they can- maybe as a % of earnings? If one is living at home playing video games all day it might be unfair to the others, but maybe you can work something out depending on their circumstances even if they can't cover 100% of the payments. My parents put the 5 of us through college (state schools were proportionately cheaper back then, even factoring in inflation) and I put DS through college- I'm a firm believer in doing it if you can do it without jeopardizing your own retirement, but you've mortgaged your future. I hope they can step up.

At the very least, I'd pay them off over 30 years rather than liquidating funds you can't get back if you need them.
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