Summary: Recently, I received an email from Chris who was interested in my opinion on taking out a 401k loan to pay off his student debt.<br> <br> “Hi Andy,<br> Did you ever consider leveraging your 401k to try to clobber debt faster?<br> I do not mean withdrawing funds from the 401k and incurring the penalty and tax hit, I mean borrowing from it and then paying it back and paying yourself the interest rather than Navient. <br> All the articles I have read say “don’t touch your 401k” but they are ALWAYS referring to withdrawing the funds rather than taking a loan. <br> I can take a loan out of my 401k up to $50,000 and I can set the repayment length to whatever monthly payment that I can afford. I want to take this $50,000 and payoff my loans in one gratifying check then use the money I was paying towards my student loan principal and interest (about $2,000 a month) to repay my 401k.<br> <br> How One Pay Raise Can Lead to Debt Freedom <a href="https://t.co/LOBDJ3E5GP">https://t.co/LOBDJ3E5GP</a><br> — Andy Hill (@AndyHillMKM) <a href="https://twitter.com/AndyHillMKM/status/942231484915691521?ref_src=twsrc%5Etfw">December 17, 2017</a><br> <br> There are some risks to this like if I lose my job I would need to repay that debt immediately but the probability of that is very low. My goal is to finish paying off my loans by 2019 (10 years after graduating college) and I am on pace to do that with either method but I think the 401k loan would save me a ton of money over just repaying the lender. This technique could be done with a HELOC too but I think that is much more dangerous.<br> I think it would be awesome to hear about the pros and cons, if not I would love to just hear your thoughts on the matter.<br> I am a huge fan, keep up the good work!<br> Thanks,<br> Chris<br> <br> Thank you so much for reaching out, Chris. I’m glad to hear that you’ve been enjoying the blog and the <a href="http://www.marriagekidsandmoney.com/mkmpodcast/">podcast</a>.<br> As far as taking a 401k loan, I was actually thinking about doing this earlier this year for investing in our first rental property. The more I’ve read and investigated, the process just didn’t work for a conservative guy like me.<br> Here’s why I didn’t go for the 401k loan:<br> 1. Potential Job Loss<br> I’m not sure how it would work with your employer, but with mine I would have to pay back all of the 401k loan money within 30-90 days if I lose my job, take a new one or leave the company for any other reason. <br> I found this commentary (below) on Reddit. An HR manager described some tough situations they experienced when employee’s 401k loans came due unexpectedly:<br> “As someone who worked in HR/Benefits for many years, the main reason I always see and advise against is that (1) no job is stable and (2) it’s not just laying off/firing that makes the loan come due. What if you get an amazing opportunity elsewhere and quit? Well that loan is still due … I’ve had people crying on the phone because they didn’t understand the terms.”<br> You could protect yourself from this situation by saving up enough liquid cash for that emergency. If you did that though, you might as well just use the cash you saved up to pay off the student loans.<br> 2. Lose Out on Crucial Retirement Returns<br> During the borrowing period, my 401k account would have been severely depleted. I have around $100k saved up right now in my 401k. If I took out $50,000 (like you’re considering), the power of my compound interest wouldn’t be so powerful. <br> I want to leave those retirement funds in there to build over time.<br> <br> 035 | Destroying $87k in Student Loans by Avoiding Lifestyle Inflation <a href="https://t.co/i8n3N3tPgJ">https://t.co/i8n3N3tPgJ</a><br> — Andy Hill (@AndyHillMKM) <a href="https://twitter."></a>
