Ok. We have $75k about to go into repayment at 7.6%. I applied for income based repayment, which is $900/month. Wife suggested taking a 401k loan at 4% to save on interest. Max term on the 401k loan is 7 years. This sounds like a bad idea to me, as the payment would go up, plus her 401k would be losing possible market gains.
No, you should not borrow from your 401K to pay off student loans – especially not federal loans that come with substantial protections and flexibility like income-driven repayment, deferment/forbearance, disability discharge, etc.
You are correct that giving up time in the market is a downside, you’re also choosing a much less flexible loan arrangement, with the possibility that it would need to be repaid in full if your wife leaves her job for any reason.
If you can afford a higher payment and aren’t pursuing a forgiveness program, make larger payments to pay off your debt faster and save interest.
You may find these links helpful:
– [Student Loans](/r/personalfinance/wiki/studentloans)
– [“How to handle $”](/r/personalfinance/wiki/commontopics)
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401k loans are limited to the lesser of $50k or 50% of the account balance. That’s not enough to pay off your student loans. If your wife loses her employment, the entire loan balance is due by that year’s tax filing date. And yes, you’ll lose out on market returns which could be substantial if the market has an up period for a few years.
Raiding a retirement account is a last-ditch effort to pay debts. I don’t think you’re there yet.
Borrowing from your 401k is robbing your future self, don’t do this.
Are these federal student loans? How much can you afford to put to the loans each month? Paying them off aggressively will save you on interest in the long term
If you think the market is going to underperform the amount you’d save on interest, then sure it could be a good idea. Also one of the responses is incorrect, recent legislation states that if you get laid off now (qplo, qualified plan loan offset), you have until the tax extension filing deadline (Oct) of the tax year of the layoff to rollover (return) the loan amount in full to another retirement account. If you find a new job in that time period you could theoretically take out a new 401K loan and put money toward that requirement.
Try using either the Avalanche or the Snowball method to bring down your debt. There are YouTube videos that have extensive information on these two methods. Prep your own meals and refrain from going out to eat.
I would absolutely not recommend borrowing against a 401k for student loans — you’ll lose a ton of options and flexibility, and you’ll be losing out on any forgiveness or better repayment options, plus any market gains you’d have made during that time.
Also, rules on income based repayment and new debt forgiveness just came out today, so you may have better options — you may get some forgiveness and qualify for lower payments (but if it hadn’t, I still wouldn’t recommend it).
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