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11/20/2019 5:07:11 PM
Posted: 5/22/2005 1:16:37 PM EST
I have a little over 20K in student loans. I have thought about taking a loan out of my 401K to pay them off, and then pay myself back with interest. What say you ARFCOM?
Link Posted: 5/22/2005 1:17:24 PM EST
How much have you been earning in your 401K?
How much are you losing in the student loans?
Link Posted: 5/22/2005 1:20:05 PM EST
NO, NO, NO!!!!

Don't pay back your student loans at an accelerated rate. Yo will never be able to borrow money at this rate again.

Your student loans should cost you about 2.5% per year.

T-bills should be paying around 4%.

You could put your money in T-bills (although there are a lot better investments) and make more money than that which you would be saving by paying off your student loans.

CLIFF NOTE VERSION: You student loans don't cost you shit. Let them ride.
Link Posted: 5/22/2005 1:23:31 PM EST

Originally Posted By recoiljunky:
NO, NO, NO!!!!



Pretty much sums it up.



In addition to the really low rate that your student loans (should) have, there's also a penalty for taking $$$ out of a 401k. Don't do it.
Link Posted: 5/22/2005 1:27:39 PM EST
That pretty much summs it up. I was thinking that due to the low interest I would have nothing to loose by paying them off over a long peroid. Also the interest is tax deductable so that should work out well.
Link Posted: 5/22/2005 1:29:04 PM EST
There is no penalty for BORROWING money out of the 401k. I did that about a year ago, and recieved NO penalty whatsoever. And like you already said, you pay YOURSELF back with interest. However, 20 thousand greenbacks is a lot to take out of the 401 for a student loan. I might consider saving the 401 for a home loan.
Link Posted: 5/22/2005 1:34:08 PM EST
Don't do it. Your 401k works better and better the more money you have in it. If you remove money from it, you lose earning power. The 401k is for retirement.

my$.02
Link Posted: 5/22/2005 1:34:34 PM EST

Originally Posted By muddawggin:
There is no penalty for BORROWING money out of the 401k.




Ooops - my bad. I missed that part. I thought he meant just taking it out.
Link Posted: 5/22/2005 1:35:03 PM EST

Originally Posted By muddawggin:
There is no penalty for BORROWING money out of the 401k. I did that about a year ago, and recieved NO penalty whatsoever. And like you already said, you pay YOURSELF back with interest. However, 20 thousand greenbacks is a lot to take out of the 401 for a student loan. I might consider saving the 401 for a home loan.

"No Penalty" ...other than your 401k monies no longer earning more % than you are losing on the Student loans.

Being 'debt free' is a worthy thing, but financially dumb if it costs you MORE money to be so.
Link Posted: 5/22/2005 1:37:43 PM EST

Originally Posted By DK-Prof:

Originally Posted By muddawggin:
There is no penalty for BORROWING money out of the 401k.




Ooops - my bad. I missed that part. I thought he meant just taking it out.



I knew what you meant.
Link Posted: 5/22/2005 1:42:32 PM EST

Originally Posted By rayra:

Originally Posted By muddawggin:
There is no penalty for BORROWING money out of the 401k. I did that about a year ago, and recieved NO penalty whatsoever. And like you already said, you pay YOURSELF back with interest. However, 20 thousand greenbacks is a lot to take out of the 401 for a student loan. I might consider saving the 401 for a home loan.

"No Penalty" ...other than your 401k monies no longer earning more % than you are losing on the Student loans.

Being 'debt free' is a worthy thing, but financially dumb if it costs you MORE money to be so.



I totally agree. Like I said, I'd save the borrowing for a mortage if the time comes. I borrowed out of desperation. But I would not use it for a student loan. I have those too. But like others have said, the more active money you have in there, the more interest accrues on your 401.
Link Posted: 5/22/2005 1:44:00 PM EST

Originally Posted By recoiljunky:

NO, NO, NO!!!!

Don't pay back your student loans at an accelerated rate. Yo will never be able to borrow money at this rate again..




+1
Link Posted: 5/22/2005 2:14:19 PM EST
No.

One important thing I did not see mentioned, at least at my company, is that when you take a loan out on your 401k, you may not contibuted to your 401k until that loan is paid off.

Since you are not contributing, you no longer benefit from company matching, etc.....

Those are the real killers. I would rather pay myself 5%-6% than student loan folks even 1%.

uwp
Link Posted: 5/22/2005 2:24:37 PM EST
Don't pay back student loans early.

Don't consider any other investments until your 401K is maxed.

Don't touch your 401K until you retire.
Link Posted: 5/22/2005 2:31:26 PM EST

Originally Posted By Rodent:
Don't pay back student loans early.

Don't consider any other investments until your 401K is maxed.

Don't touch your 401K until you retire.



+1
Link Posted: 5/22/2005 2:37:32 PM EST
You didn't mention your religious beliefs, so maybe this doesn't apply.

But if you are a devout Christian, you should pay off any debt.

If you are not, then disregard whatever I said.
Link Posted: 5/22/2005 5:22:58 PM EST
OP, I don' t think he was talking about defaulting on his loan, he was just asking if it would be wise to pay it off early.
Link Posted: 5/23/2005 3:15:59 AM EST

Originally Posted By Rodent:
OP, I don' t think he was talking about defaulting on his loan, he was just asking if it would be wise to pay it off early.



I understood.

But I wasn't talking about default either.

Christians are instructed to get out of debt as soon as possible. That was my advice, if he was a Christian.

If he is not, it makes no difference.
Link Posted: 5/23/2005 3:43:13 AM EST
Always pay yourself first (pre-tax). Never dip into your 401k for any reason, you'll just lose more to taxes than it can really be worth to you. You canconsolidate and deduct the (low) interest on you student loans and pay them off in time. JMHO
Link Posted: 5/23/2005 5:33:43 AM EST
DO NOT borrow from the 401k to pay off a 2.5% debt. Even if you are "paying yourself" interest, it is first, money that comes out of your pocket (not REAL interest) and second, a 5-6% "gain" for the loss of whatever the market returns. Bad mojo.
Link Posted: 5/23/2005 5:38:56 AM EST
Suze Orman did a piece on this on her show once.

Essentially, if you take money out of the 401k as a loan, it's taxed as if it was income. Then when you pay money back into the 401k, it's POST tax money. So you're double taxed on the money you take out of the 401k. It's not worthwhile especially to pay off something like student loans.

Shawn
Link Posted: 5/23/2005 6:34:07 AM EST
[Last Edit: 5/23/2005 7:32:24 AM EST by PeteCO]

Originally Posted By srv656s:
Suze Orman did a piece on this on her show once.

Essentially, if you take money out of the 401k as a loan, it's taxed as if it was income. Then when you pay money back into the 401k, it's POST tax money. So you're double taxed on the money you take out of the 401k. It's not worthwhile especially to pay off something like student loans.

Shawn



She is right on that one (surprisingly), even though I'd generally sooner take a running chainsaw to my nutsack than listen too closely to her, uh, "advice". I've never seen loan proceeds taxable like W2 income.
Link Posted: 5/23/2005 7:19:31 AM EST

Originally Posted By Old_Painless:

Originally Posted By Rodent:
OP, I don' t think he was talking about defaulting on his loan, he was just asking if it would be wise to pay it off early.



I understood.

But I wasn't talking about default either.

Christians are instructed to get out of debt as soon as possible. That was my advice, if he was a Christian.

If he is not, it makes no difference.



True, but even David Ramsey, the only advisor giving purely scripturally-based financial advice (that I am aware of) would advise against a 401k loan.
Link Posted: 5/23/2005 7:29:15 AM EST

Originally Posted By srv656s:
Suze Orman did a piece on this on her show once.

Essentially, if you take money out of the 401k as a loan, it's taxed as if it was income. Then when you pay money back into the 401k, it's POST tax money. So you're double taxed on the money you take out of the 401k. It's not worthwhile especially to pay off something like student loans.

Shawn



How are the proceeds of a 401k loan taxed as income? You borrow $10k, you get a check for $10k, and none of it is reported on your tax return. What am I missing? As far as paying the loan back with post tax money, you'll be paying any lender back with post tax money anyhow, so what's the difference? Anyone have so numbers to show me what I'm not understanding?

That being said, I've borrowed from a 401k before and likely won't do it again. I borrowed in 2001 when the stock market was still in the tank and I'd figured I might well be paying myself 6% interest as opposed the crappy returns I was getting at the time. What has happened was that the monetary amount of the loan was not in that 401k plan and able to enjoy the increased dividends when the market recovered a year later.
Link Posted: 5/23/2005 7:32:13 AM EST
In general: Use your 401k only as a last resort to avoid bankruptcy.

Do the numbers - Look at what you will pay in taxes and/or penalties for a premature distribution, or the long-term impact of taking out a loan against your 401k, vs. what you expect to spend in interest on the student loan and the tax consequences thereof.
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