Should I Use My Inheritance to Pay Off Student Loans?
I am trying to decide what to do about my student loan. I have an inheritance trust from my father that is set up as a retirement that I can’t access until I’m 65. (I’m 53 now.)
There is a provision that I may use the funds for tuition, however. I currently owe $33,804 on my student loan. It is on an income-based repayment plan and I pay $240 per month, but it will go up every year. (Last year it was only $79). I’m paying 5.75% interest. For the last two years, none of the payments have gone toward the principal.
The money in my trust is only earning about 3% in a very conservative mutual fund. If I withdraw the money, I won’t have to pay a penalty, but it will be taxable income. So, withdrawing the $33,000 would put me in the 24% tax bracket next year. I would need to take out an additional $8,000 to cover the tax liability, making my total withdrawal $41,000.
My family says that I am making “emotional decisions” about money because I just want to pay off the loan and be done with it. I hate the monthly reminder of the amount I spent on an education that hasn’t advanced my career financially, and I hate the idea of giving the government $13,000 in interest.
My thought was I could take the $250 to $300 per month and put it in a Roth IRA or some other savings interest that is a little more liquid since both my employer-based retirement plan and my inheritance trust can’t be withdrawn or even borrowed against. I could certainly earn more than 3%, right?
Are there other options I’m not seeing?
First, please trust me that you’re not the only person in their 50s trying to figure out the best way to pay off student loans.
A Pew Research Center analysis of Federal Reserve data shows that 7% of adults ages 45-59 have student loan debt from their own education. But the debt surely hurts worse when you can’t see the tangible career growth you anticipated when you signed up for those loans.
If you were making an emotional decision, you would have drained that trust and paid off your loans already. By weighing your options and asking if there are others you haven’t considered, it’s clear to me you’re thinking this through very carefully.
By my count, you’ll be paying these loans for another 11 years before you have a clean slate. That would take you up to age 64 — just one year before you’d be able to access those inheritance funds otherwise.
How to Pay Off Student Loans With Inheritance
I wanted to be sure I was considering all the options, so I reached out to certified financial planner Mike Chadwick.
Based on the information you provided, Chadwick said to consider the opportunity cost.
Chadwick explained that the amount of money in the trust will grow more quickly before you retire than if you started a new retirement savings account. “She could save the $240 per month into a Roth and that’s great, but it wouldn’t come close to doing what the lump sum would do in terms of accumulation over time,” he said.
“An alternate strategy would be to simply take out the monthly payment from the trust to pay the student loan, essentially washing the two away,” Chadwick said.
You wouldn’t get the satisfaction of paying off your student loans with a lump sum, but you would minimize your tax consequences and avoid having to take the monthly loan payment from your income. That allows you to still invest that $250 or so into a liquid investment fund.
Chadwick also suggested reallocating the trust if it’s only earning 3%. “There are a plethora of options for that depending on the rules of the document,” he said.
In short: Take a look at the terms of the trust and consider contacting a financial adviser for an in-depth examination of your options. Depending on how it was set up, you may need to take required distributions anyway, which Chadwick said would reduce some of the blowback from your family.
Whatever you decide, I can assure you that you’ll still have to talk about this and other money issues with your family.
I would remind you that your father left the trust to you and you alone. You might be thinking about what your father would want you to do, if you were close. That’s fine.
But you can’t make this decision based on what your (living) family members think. If you’re the only beneficiary on that trust, it’s no one’s decision but your own, and you should take your (well thought-out, financial adviser-approved) next step with confidence.
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