Today, a client elected to have us settle her defaulted federal student loans in full by payment from her 401k. While we normally don’t recommend using protected 401k monies to settle debt, this particular client makes too much for debt forgiveness. A settlement now will likely result in 10% reduction in principal and waiver of the 25% collection fees since she is in default.
While you normally cannot settle federal student loans, there is an opportunity to do so when the loans are in default and a hardship exists. So by paying them now from her 401k, she’ll likely see a 1/3 reduction in her loan balance. Put another way, that’s a 35% return!
The average interest rate on federal student loans is also 6.8%. Most people are not getting those rates with CDs, money markets, stocks and bonds. So paying off the federal loans often makes sense from this perspective as well.
For more information on settling student loan debt, please schedule a consultation with an attorney at Christie D. Arkovich, P.A.