Borrowing from your future isn’t a decision you should make lightly. But if you’re in a bind or your only other option is to take on high-interest debt, a 401(k) loan might be your best choice.
Taking out a 401(k) loan isn’t uncommon. According to a 2016 report by the Investment Company Institute, 17 percent of 401(k) participants have loans outstanding on their accounts.
Before you do, however, consider these four 401(k) loan rules that could limit your borrowing power and cost you more than just interest and fees.
401(k) loan rules that can backfire
1. You’re limited in how much you can borrow (if at all)
Although the Internal Revenue Service (IRS) allows 401(k) plans to offer loans, it’s not a requirement. So, your 401(k) administrator might not allow you to borrow from your retirement account at all.
If it does, you’re limited in how much you can take out. According to IRS rules, you can borrow the lesser of the following:
- The greater of $10,000 or 50 percent of your vested account balance
For example, if you have a $50,000 vested balance in your 401(k) account, you can borrow only up to $25,000.
Note: Vesting is a process that allows you, the employee, to get full rights to some or all of your employer’s contributions to your 401(k) plan. Some employers give 100 percent vesting from the start. Others might require that you work for the company for a period before you gain access the full contributions.
What you can do: Check with your 401(k) plan administrator to see if loans are available and what fees, taxes, and penalties might apply. Then, calculate how much you can borrow to determine if it’s enough for your needs.
2. If you default, it could mean extra taxes
When you borrow from your 401(k), you’re required to pay back the loan in five years or less. The only exception is if you use the funds to buy a house as your primary residence. For this use, the IRS allows longer repayment periods.
In either case, if you don’t make payments at least quarterly and repay the loan in full by the deadline, your employer will report the entire amount of the loan as a regular distribution.
If you’re not 59 and a half yet, that distribution could be subject to income tax and a 10 percent early withdrawal penalty.
For example, say you borrow $10,000 and don’t pay the 401(k) loan back within five years. If your effective tax rate is 15 percent and you’re not exempt from the 10 percent early distribution penalty, you could owe $2,500 (25 percent) when you file your taxes for the year.
What you can do: Calculate the potential penalties if you can’t repay the loan on time. Then, identify lower-cost alternatives to a 401(k) loan that might have lower fees and interest.
3. Leaving your job could cost you
If you leave your job or get laid off, your plan administrator can require that you pay back the full amount of the loan within 60 days, regardless of your original repayment plan.
If you don’t repay the loan by the deadline, the employer will treat the amount you borrowed as a regular distribution, making it potentially subject to income tax and the 10 percent penalty if you’re not yet 59 and a half.
The risk of defaulting on the loan is high too. In a 2015 study, the National Bureau of Economic Research found that 86 percent of people who terminated employment with 401(k) loans outstanding defaulted.
If your job isn’t stable or you plan to search for a new job in the next five years, a 401(k) loan might not be your best option.
What you can do: Assess how stable your job situation is. If you have any reason to believe you might switch jobs or lose your job during the repayment period, look for alternatives that have more predictable repayment terms.
4. You could lose potential investment earnings
When you take money out of your 401(k) for any reason, that money is no longer working for you. That’s because with some 401(k) plans, the amount you borrow doesn’t go back into your investment account until the loan is paid in full.
For example, if you borrow $10,000 with a 5 percent interest rate, you’ll pay $1,323 in interest over five years. If you earn 7 percent annually on your 401(k) investments during that same time, you’ll also lose out on $4,026 in earnings on the $10,000 you borrow.
So, even if your 401(k) loan fees are low, the total cost of the loan between interest and lost earnings in this example is $5,349.
That said, it could work to your advantage if the market is down during that time. Since 401(k) funds are usually invested in a mixture of stocks and bonds, the movement of those investments will affect your balance.
For example, say your 401(k) investments have an average annual loss of 4 percent over the loan’s five-year repayment term. In this case, the $10,000 loan will save you from a loss of $1,846, and you’ll essentially make $523 on the loan.
What you can do: There’s no way to predict how the stock market will perform. But you should ask yourself whether you’re willing to take on the risk of losing that investment growth. Because of the time value of money, it could take you years to make up for the forfeited growth.
You also should check with your 401(k) plan representative to see if they credit your monthly payments to your 401(k) account or wait until the entire balance is repaid.
Know how 401(k) loan rules affect you
401(k) loans can work in your favor, but they also can carry hidden costs. That’s why it’s crucial for you to consider all the potential scenarios before you apply for one.
Make sure you understand how 401(k) loan rules can add extra costs and risks and then decide whether you can afford them. That way, you’ll be prepared if things go south.
Interested in refinancing student loans?Here are the top 8 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 4.25% APR (with Auto Pay) to 8.77% APR (with Auto Pay). Variable rate loan rates range from 3.50% APR (with Auto Pay) to 8.72% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of March 18, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 3/18/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
ANNUAL PERCENTAGE RATE (“APR”)
There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.
For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
ELIGIBILITY & ELIGIBLE LOANS
Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).
Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.
All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.
For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.
The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.
The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.
POSTPONING OR REDUCING PAYMENTS
After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship.
We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.
We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.
If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of March 4, 2020 and is subject to change.
3 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
Education Refinance Loan Rate Disclosure: Variable interest rates range from 2.72%-9.05% (2.72%-9.05% APR). Fixed interest rates range from 3.79%-9.30% (3.79%-9.30% APR).
Variable Rate Disclosure: Variable Rates are based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 1, 2020, the one-month LIBOR rate is 0.92%. Variable interest rates will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree and presence of a co-signer. The maximum variable rate is the greater of 21.00% or Prime Rate plus 9.00%.
Fixed Rate Disclosure: Fixed rate ranges are based on applicable terms, level of degree, and presence of a co-signer.
Lowest Rate Disclosure: Lowest rates require a 5-year repayment term, immediate repayment, a graduate degree (where applicable), and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Rates are subject to additional terms and conditions, and are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer. Borrowers should carefully review federal benefits, especially if they work in public service, are in the military, are considering possible loan forgiveness options, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision on our website including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
Citizens Bank Student Loan Eligibility: Applicants must be enrolled at least half-time in a degree-granting program at an eligible institution.
Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
4 Important Disclosures for SoFi.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 1.67% effective February 10, 2020.
6 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 03/26/2020 student loan refinancing rates range from 1.90% to 7.89% Variable APR with AutoPay and 3.39% to 7.75% Fixed APR with AutoPay.
7 Important Disclosures for College Ave.
College Ave Disclosures
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
1College Ave Refi Education loans are not currently available to residents of Maine.
2All rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.
4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 4/3/2020. Variable interest rates may increase after consummation.
|3.50% – 8.72%1||Undergrad & Graduate|
|1.99% – 6.65%2||Undergrad & Graduate|
|2.72% – 9.05%3||Undergrad & Graduate|
|3.50% – 8.70%4||Undergrad & Graduate|
|1.76% – 5.84%5||Undergrad & Graduate|
|1.90% – 7.89%6||Undergrad & Graduate|
|3.50% – 6.01%||Undergrad |
|3.89% – 9.24%7||Undergrad & Graduate|