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The potential advantages are not worth the risk --> having to pay off the loan in full, at once, if you are laid off or are fired. We all like to think that would never happen to us, but I had to lay off someone on my team during a downsize a few years ago and the first words out of the person's mouth were "oh, ****....what does this mean if I have a loan out on my 401k?" I believe HR said it was due within 30 days and would be taken directly out of the severance + vacation days check if they didn't have the cash to pay it back (assuming a few week's severance + a few vacay days even covered the amount due).
Well, it wouldn't be like he was really losing $145K over his life.
He'd now be saving ~$190/mo on his car loan. So if he now puts that saved amount back into the market through repayment each month, it comes out close to a wash.
I believe his 401k balance 5 years from now would look somewhat similar? In fact maybe a little bit higher? This is because his student loan rate is higher than what the market would return (we're assuming). Of course if he takes his monthly savings from lower interest and just spends it on stuff rather than reinvesting his balance will be lower.
If he was putting 8500 on the sidelines for 5 years and doing nothing with it, then yes, he'd miss out on 145K over 40 years. But that's not this situation.
Now with that said, since it's not a huge advantage, I'm not sure whether it's worth the risk of a job loss where he might owe it immediately. And obviously not if he lost his funding or matching ability.
That is exactly what he will be doing with those funds though and that is the point--it's a short term savings with pretty serious long term consequences.
Well, it wouldn't be like he was really losing $145K over his life.
He'd now be saving ~$190/mo on his car loan. So if he now puts that saved amount back into the market through repayment each month, it comes out close to a wash.
I believe his 401k balance 5 years from now would look somewhat similar? In fact maybe a little bit higher? This is because his student loan rate is higher than what the market would return (we're assuming). Of course if he takes his monthly savings from lower interest and just spends it on stuff rather than reinvesting his balance will be lower.
If he was putting 8500 on the sidelines for 5 years and doing nothing with it, then yes, he'd miss out on 145K over 40 years. But that's not this situation.
Now with that said, since it's not a huge advantage, I'm not sure whether it's worth the risk of a job loss where he might owe it immediately. And obviously not if he lost his funding or matching ability.
Quote:
Originally Posted by golfgal
That is exactly what he will be doing with those funds though and that is the point--it's a short term savings with pretty serious long term consequences.
What? No, read my post again.
Although that specific 8500 is gone, he's replenishing it through all the extra cashflow he has each month now due to no student loan payment. And that replenishment rate over 5 years is significant due to the high interest rate of the student loan.
That is, he borrowed 8500 to save himself 10,800 in total SL payment on the loan over the next 5 years (calculated from 10.5% interest for 57 months). So over 5 years he's contributing 10,800* back into a 401k that he took 8,500 out of.
* If he reinvests all his savings - the minimum he would have to put back in would actually be around 9,000.
Mustang,
DO IT!
It makes sense, in every way, to pay it off and pay less interest.
That is a no brainer.
You are paying off a HIGH interest loan that will NEVER GO AWAY with
a LOW interest loan that is insecured.
You will have it paid off, and if you want, pay it off early, don't
blow the money, see if you can cut a year off since the payments
WILL BE ALOT LOWER.
You are right, DO IT!
We can't pay it all off, not enough money in the 401ks. I was mainly going to focus on one private student loan that is 10.5% interest. It is ~$8900. Current plan has it payed off February, 2018. So just under 5 years.
You want to tap into your 401k to pay off a student loan balance of only $8900? Jesus Christ, no. Don't do it. Pay that sucker off. That is not a good habit to get into.
For examples sake let's say the OP's rate of return on his 401k over the next 5 years is going to be 3.25%/yr. (I believe that is the rate he said the 401k loan would have). How is he losing out on any long term gains or return on the 401k?? The money gets replenished back into the 401k. It is not 'gone for good'. Also, while it certainly may exist, I have never heard of a plan that won't let you continue to contribute while you have a loan outstanding. You can typically continue to contribute and continue to receive the company match as well.
For examples sake let's say the OP's rate of return on his 401k over the next 5 years is going to be 3.25%/yr. (I believe that is the rate he said the 401k loan would have). How is he losing out on any long term gains or return on the 401k?? The money gets replenished back into the 401k. It is not 'gone for good'. Also, while it certainly may exist, I have never heard of a plan that won't let you continue to contribute while you have a loan outstanding. You can typically continue to contribute and continue to receive the company match as well.
Well, the most recent annual gains have been WAY OVER 3.25%, that's the biggest miss. My 401k gains for 2010, 2011, and 2012 were all in the 10-16% range and this year already +15% and it's only May 16th. Anyone who wasn't funneling every possible dollar into the stock market over the last 3.5 years is a complete fool and missed one of the biggest run-ups in the history of the US stock market. And we are STILL on an upward trajectory, for now at least. I would not take $1 out to pay off a piddly sub -$10k student loan.
Between my wife and I we have about $70k in loans. We are on 10 year plans with them. I was just focusing on a high interest one. The rest are average and lower on the interest.
I figure the money is going back in. I also admit my 401k is doing well but we know how markets change but my debt won't.
We don't have much money afterwards every month. We live pretty frugally. In fact we wonder if at times we need to cut back on some of our loans to free up more cash. Student loans are still our biggest bill every month at $1300 a month.
Then why come and ask for advice if you aren't going to listen. Student loan payments are not fun, but they are better than not going to college at all. Get a part time job on the weekends, both of you and put all of those funds toward your loans to pay them off faster if you want.
Well, the most recent annual gains have been WAY OVER 3.25%, that's the biggest miss. My 401k gains for 2010, 2011, and 2012 were all in the 10-16% range and this year already +15% and it's only May 16th. Anyone who wasn't funneling every possible dollar into the stock market over the last 3.5 years is a complete fool and missed one of the biggest run-ups in the history of the US stock market. And we are STILL on an upward trajectory, for now at least. I would not take $1 out to pay off a piddly sub -$10k student loan.
"Anyone who wasn't funneling every possible dollar into the stock market over the last 3.5 years is a complete fool" A person who did a max 401k loan in 2007 before the crash looks like a genius. I suppose you probably pulled every cent out of stocks just before the crash and then put it all back into stocks the day the Dow bottomed out.
After the big run up, now might be the perfect time to do a 401k loan.
"Piddly" to you does not equate to piddly for all.
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A person who did a max 401k loan in 2007 before the crash looks like a genius. I suppose you probably pulled every cent out of stocks just before the crash and then put it all back into stocks the day the Dow bottomed out. 
