The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: hgjjgkj on January 15, 2019, 12:05:11 PM
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I have about 130k in loans at 6.5%. The borrowing cost at our 401k is high at around 5%. Is there ever a thesis where it makes sense to borrow from it to pay it down?
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Have you looked into refinancing? I wouldn't borrow from the 401k, if you ever leave the company you'll be forced to repay it in full. I bet you could refinance to 5% or less.
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I have recently taken a credit hit, though I have no idea why ( I am a churner though). Until this past month my credit score was always in the 780+ range and I could never get refinancing in the 5% range.
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What are the upfront fees incurred by taking out of the 401k? Is that 5% a fee or interest that you pay back to yourself (into the 401k)?
This is one of the few times it may makes sense, so that you are paying yourself interest instead of the bank. You will still lose out mathematically to investing, but it is close enough that it may be worth it (to you)
HOWEVER: Some things to consider:
1) If you have a job loss, the 401k repayment becomes due immediately or pay the fine. Thats expensive.
2) Student loans, as crappy as they are, have some pretty good repayment flexibility in an emergency. You could easily buy yourself a few months without too much expense in a job loss. Compared to the (drastic) repayment requirements of a 401k loan, the student loans are downright generous.
3) How quickly could you pay off the student loans without the 401k loan
4) how quickly could you pay off the 401k loan.
Overall, there is a ton of risk and you lose mathematically by doing this in the average scenario, but it is an interesting idea.
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Also... Refinancing makes WAY more sense. Especially if you can get down to 4% or so.
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401(k) loans are almost always a bad idea.
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I would not do it.
1. You lose financially, both in terms of capital growth AND because of the fees.
2. It also opens you up to the risks that TexasRunner mentioned in case of job loss -- fines, the loss of a "flexible" debt, etc.
You can always lower how much you're putting into your 401k and start shovelling that towards loans -- that is potentially a fine idea. I would personally really, really not take anything out of the 401k to put towards the loans, though.
I'm surprised you weren't able to get the 5% range for refinancing -- do you have an especially high DTI or similar? (Would not be surprising if you're carrying 130k in student loans.)
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Are your loans already consolidated? Try doing refinance quotes on just one of the loan balances. Even getting a chunk of the 130k at a lower interest rate is helpful.
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Are your loans already consolidated? Try doing refinance quotes on just one of the loan balances. Even getting a chunk of the 130k at a lower interest rate is helpful.
Good point - Especially if you can target one of the higher balances with the highest interest (assuming they're different). I wouldn't forgo 401k contributions to pay this off because 6.5% (still) isn't historically high. It is about break even for investing vs paying this off... EXCEPT 401k is tax-free. So if you are in the 12% marginal tax bracket, you will lose 12% of anything you put towards student loans above the minimum if it goes there instead of 401k.
Once you max out every tax-free / deferred option, kill the student loans.
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1) If you have a job loss, the 401k repayment becomes due immediately or pay the fine. Thats expensive.
Maybe members (myself included) have been able to setup a payment plan after leaving an employer, but they don't have to offer this option.