# Should I take out a "loan" against my 401k to pay off student debt? **URL:** \ **Category:** In My Humble Opinion\ **Created:** [April 21, 2013, 1:06pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305 "2013-04-21T13:06:08Z")\ **Posts on this page:** 15\ **Page:** 3
**Author:** ![elninost0rm](https://avatars.discourse-cdn.com/v4/letter/e/ed655f/32.png) [@elninost0rm](https://boards.straightdope.com/u/elninost0rm)\ **Post date:** [April 23, 2013, 4:49pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/41 "2013-04-23T16:49:31Z")
I know that with the federal employee TSP, this is actually a sensible option. You can still contribute (not sure if matched during that the loan length, though) and then just essentially pay your student loan payment (likely reduced in either term or monthly payment amount) back to your TSP account. I know that the TSP rate is something crazy like 1.9%. I’d much rather pay that than the 6-7% of (some) of my student loans. I know this is only an option if you’re a federal employee, but it’s something that I’ve been considering. I’ve only been a fed. for ~1 1/2 years now, so I’ll need more money in the account before I can even consider it. ---
**Author:** ![Lacunae\_Matata](https://avatars.discourse-cdn.com/v4/letter/l/8491ac/32.png) [@Lacunae\_Matata](https://boards.straightdope.com/u/Lacunae_Matata)\ **Post date:** [April 23, 2013, 4:54pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/42 "2013-04-23T16:54:14Z")
> [@MsRobyn](#): > > The repo man may not be able to repossess a degree, but the lender can make life miserable for the borrower and any co-signers. A private lender can, for example, sue you and your co-signers for the unpaid balance and any fees that come with it. Before that point, it can trash both parties’ credit and sic a collection agency and/or servicer on both parties in an attempt to get them to pay something toward the loan. Additionally, states are increasingly tying professional licensure to repayment of student loans; if you don’t do something, you can’t get a license to practice your profession. That being said, however, the banks are sowing the seeds of their own destruction because, although they make borrowers’ lives miserable, student loans are often a money-losing proposition if the borrower can’t pay it back, and the banks often have no good options for forbearance or reduced payments as federal loans do. > > So the strategy of paying the car off and then throwing that money toward the private loan is a good one, as long as the private student loan is current and under control. Yeah, it was kind of a joke about the repo man :), but it sounds like payments are current on the student loan, so no worries about losing professional licenses. (And banks or collection agencies can make life miserable for anyone with an overdue loan of any sort…) ---
**Author:** ![GargoyleWB](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/gargoylewb/32/199_2.png) [@GargoyleWB](https://boards.straightdope.com/u/GargoyleWB)\ **Post date:** [April 23, 2013, 6:41pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/43 "2013-04-23T18:41:55Z")
> [@Voyager](#): > > … > The plan I was in forced you to stop contributing while the loan was outstanding. Check your plan… Yes, I believe they are all fund-dependent and plans are very rarely a “pure” 401k, but more often a hybridized 401k-style fund. My data point…I can freely take loans out from the fund, but the interest rate and term are dependent on the purpose. House purchase and emergency events are quite competitive, but other purposes are a higher interest 5-year term, though still can be a positive alternative. Contributions into the fund continue as normal. ---
**Author:** ![Kimballkid](https://avatars.discourse-cdn.com/v4/letter/k/b5a626/32.png) [@Kimballkid](https://boards.straightdope.com/u/Kimballkid)\ **Post date:** [April 23, 2013, 7:07pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/44 "2013-04-23T19:07:12Z")
> [@MsRobyn](#): > > The repo man may not be able to repossess a degree, but the lender can make life miserable for the borrower and any co-signers. A private lender can, for example, sue you and your co-signers for the unpaid balance and any fees that come with it. Before that point, it can trash both parties’ credit and sic a collection agency and/or servicer on both parties in an attempt to get them to pay something toward the loan. Repossession, and it’s aftermath, sucks. Here’s a little hint: don’t cosign any loans period!! I just finally got out from under the aftermath of the shit my brother put me through when I cosigned a vehicle loan with him. ---
**Author:** ![Kimballkid](https://avatars.discourse-cdn.com/v4/letter/k/b5a626/32.png) [@Kimballkid](https://boards.straightdope.com/u/Kimballkid)\ **Post date:** [April 23, 2013, 7:09pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/45 "2013-04-23T19:09:16Z")
> [@MsRobyn](#): > > That being said, however, the banks are sowing the seeds of their own destruction because, although they make borrowers’ lives miserable, student loans are often a money-losing proposition if the borrower can’t pay it back, and the banks often have no good options for forbearance or reduced payments as federal loans do. Don’t private student loans have hardship deferments/postponements like federal loans? ---
**Author:** ![hajario](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hajario/32/171_2.png) [@hajario](https://boards.straightdope.com/u/hajario)\ **Post date:** [April 23, 2013, 7:13pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/46 "2013-04-23T19:13:40Z")
> [@Kimballkid](#): > > Repossession, and it’s aftermath, sucks. Here’s a little hint: don’t cosign any loans period!! I just finally got out from under the aftermath of the shit my brother put me through when I cosigned a vehicle loan with him. I was made a _reference_ for one of my friend’s student loans. He didn’t ask my permission and that doesn’t even matter because the lender didn’t bother to check with me. I got calls for years from people looking for him. Some of those callers were complete assholes and accused me of lying when I told them, truthfully, that I had no idea how to get a hold of him. ---
**Author:** ![Labrador\_Deceiver](https://avatars.discourse-cdn.com/v4/letter/l/7c8e57/32.png) [@Labrador\_Deceiver](https://boards.straightdope.com/u/Labrador_Deceiver)\ **Post date:** [April 23, 2013, 7:19pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/47 "2013-04-23T19:19:55Z")
> [@Really\_Not\_All\_That\_Bright](#): > > No offense taken. I’m not an expert or anything; my qualifications in this field are basically limited to being good with my own money. Anyway, the interest paid per year on the 401(k) loan is being paid _back to him_, which surely offsets the loss of the tax deduction. The interest accruing on the student loan doesn’t benefit him at all. You’re not taking the loss of the employer match into consideration. ---
**Author:** ![MsRobyn](https://avatars.discourse-cdn.com/v4/letter/m/90ced4/32.png) [@MsRobyn](https://boards.straightdope.com/u/MsRobyn)\ **Post date:** [April 24, 2013, 11:11am UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/48 "2013-04-24T11:11:31Z")
> [@Kimballkid](#): > > Repossession, and it’s aftermath, sucks. Here’s a little hint: don’t cosign any loans period!! I just finally got out from under the aftermath of the shit my brother put me through when I cosigned a vehicle loan with him. Oh, dear lord yes. I can’t tell you how many times I had to break the news to someone’s dear old grandma or grandpa that their beloved grandson/granddaughter was a deadbeat, and they’re on the hook for the loan. There’s nothing I love more than stirring up shit, let me tell you. :rolleyes: > [@Kimballkid](#): > > Don’t private student loans have hardship deferments/postponements like federal loans? Some have at least some options, but they’re nowhere near as generous as federal loans. Federal loans can (at least in theory) be postponed for 12 years or more. (My trainer had a story about a borrower who took a few classes each semester in community college so that her loans were always on deferment. She went 20 years before she was required to make any sort of repayment.) Private loans may have a forbearance period of maybe six months at a time with 12 months total over the life of the loan, and with a fixed in-school deferment period. For example, if the private loan has an in-school deferment period of five years and the student takes six to graduate, tough shit. The student (or the cosigner) has to start making payments. There are students who take out federal loans to get the refunds to pay on the private loans. ---
**Author:** ![What\_the](https://avatars.discourse-cdn.com/v4/letter/w/f4b2a3/32.png) [@What\_the](https://boards.straightdope.com/u/What_the)\ **Post date:** [April 24, 2013, 12:43pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/49 "2013-04-24T12:43:46Z")
> [@Really\_Not\_All\_That\_Bright](#): > > No offense taken. I’m not an expert or anything; my qualifications in this field are basically limited to being good with my own money. Anyway, the interest paid per year on the 401(k) loan is being paid _back to him_, which surely offsets the loss of the tax deduction. However, your own money which you are using to pay the interest on a 401k loan is going to be taxed again when you take distributions. Double taxation is not generally a good thing. ---
**Author:** ![Mama\_Zappa](https://avatars.discourse-cdn.com/v4/letter/m/71e660/32.png) [@Mama\_Zappa](https://boards.straightdope.com/u/Mama_Zappa)\ **Post date:** [April 24, 2013, 12:46pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/50 "2013-04-24T12:46:46Z")
> [@Really\_Not\_All\_That\_Bright](#): > > … > > I thought this was only true if you didn’t have a qualifying account to roll the 401(k) funds into? Nope. Too many cites out there to bother pasting them in, but do a search on “401(k) loan change job” and you’ll get a lot of hits. It’s conceivable that some plans might let you continue making payments, but I haven’t been able to find any cites. If your company is acquired by another, you may (probably WILL) be able to continue making payments on the old loan even though nominally your employer has changed - when my company was acquired 10+ years back, several people found themselves in that position. In their case it was an annoyance because they could no longer have the repayments taken out of their paycheck. The plan required them to send a check every month (and IIRC it had to be a bank / certified check, not a regular one). A fun ramification: if you have an outstanding loan, and you’ve spent it on whatever purpose, chances are good you won’t even have the cash to pay the penalty / extra income tax. Imagine a 10,000 loan, and you’re at a 25% tax bracket. Next April 15th, you’ll have to come up with 3,500 dollars (2,500 tax, 1,000 penalty). Ouch. All in all, there are very few situations in which I’d think a 401(k) loan was worth the risk. ---
**Author:** ![Mama\_Zappa](https://avatars.discourse-cdn.com/v4/letter/m/71e660/32.png) [@Mama\_Zappa](https://boards.straightdope.com/u/Mama_Zappa)\ **Post date:** [April 24, 2013, 12:51pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/51 "2013-04-24T12:51:50Z")
> [@drewtwo99](#): > > … > But anyhow, just went through and lowered my automatic student loan payments to the bare minimum, which will leave me a whopping $644.53 extra per month to pay toward my car loan, which I already am paying off well ahead of time… > Anyhow, at this rate I’ll have over $1000 to throw at the car and if only $100 of that or so goes to interest (I understand less and less will go towards interest as the principal declines), I might have it paid off this time next year (regular maturity date is in 2018!!)… Sweet!! 🙂 In a year, you’ll be freeing up a _ton_ of monthly cash flow once that car payment stops. You can throw THAT at the student loan and be done with THAT sooner than planned. It’ll be an amazingly liberating feeling. You’re in better shape than a lot of folks! ---
**Author:** ![Kimballkid](https://avatars.discourse-cdn.com/v4/letter/k/b5a626/32.png) [@Kimballkid](https://boards.straightdope.com/u/Kimballkid)\ **Post date:** [April 24, 2013, 4:32pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/52 "2013-04-24T16:32:56Z")
> [@Mama\_Zappa](#): > > You’re in better shape than a lot of folks! Indeed! ---
**Author:** ![Mama\_Zappa](https://avatars.discourse-cdn.com/v4/letter/m/71e660/32.png) [@Mama\_Zappa](https://boards.straightdope.com/u/Mama_Zappa)\ **Post date:** [April 24, 2013, 6:14pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/53 "2013-04-24T18:14:29Z")
> [@What\_the](#): > > However, your own money which you are using to pay the interest on a 401k loan is going to be taxed again when you take distributions. > > Double taxation is not generally a good thing. I thought that was nuts… but apparently you’re correct. Bizarre. So you have put aside 50,000 pretax and it’s grown to 60,000. You borrow 30,000. You pay back 31,000 (principal, plus 1,000 interest) with your post-tax money. You retire and withdraw 61,000 and it’s all taxed. Logic suggests that the 1,000 should be treated as a post-tax contribution and not taxed again at age 65, but apparently you _do_ pay taxes on that. [cite](http://dailyperk.perkstreet.com/401k-loan-interest/). At least the double taxation is “only” on the interest portion. I wonder how it works if you’d been making **post-tax** contributions? ---
**Author:** ![What\_the](https://avatars.discourse-cdn.com/v4/letter/w/f4b2a3/32.png) [@What\_the](https://boards.straightdope.com/u/What_the)\ **Post date:** [April 26, 2013, 1:55pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/54 "2013-04-26T13:55:41Z")
> [@Mama\_Zappa](#): > > I wonder how it works if you’d been making **post-tax** contributions? I don’t know how “designated Roth” contributions to a 401k work. I would think that you could avoid “double taxation” if separate accounts are maintained and you can designate that the loan comes out of your Roth account. ---
**Author:** ![Mama\_Zappa](https://avatars.discourse-cdn.com/v4/letter/m/71e660/32.png) [@Mama\_Zappa](https://boards.straightdope.com/u/Mama_Zappa)\ **Post date:** [April 26, 2013, 4:25pm UTC](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305/55 "2013-04-26T16:25:02Z")
> [@What\_the](#): > > I don’t know how “designated Roth” contributions to a 401k work. I would think that you could avoid “double taxation” if separate accounts are maintained and you can designate that the loan comes out of your Roth account. That would be an interesting option. Of course, with Roth, the income wouldn’t be taxed _anyway_. But it’s also possible to have a regular 401(k) and make post-tax contributions to that. For those - ignoring the whole loan scenario - I think it’s handled like an IRA in that when you take a distribution, you have to figure out some ratio of post-tax to pre-tax and pay income on the pretax fraction. [Previous page](https://boards.straightdope.com/t/should-i-take-out-a-loan-against-my-401k-to-pay-off-student-debt/656305.md?page=2)