Should I borrow from my retirement account?
October 12, 2020

Dear Frost,

I’m considering taking out a loan against my 401(k) to pay off the last of my student loan debt. Right now, the rate is two points lower, and I know I’ll have it all paid off in the 5-year time frame—in time for retirement. — Borrow from My Future?

Illustration of a piggy bank labeled 401(k) handing money to a piggy bank labeled student loan.

Dear Borrow,

Good to hear from you! This isn’t a very common question, but it’s certainly a good one to dig into. As people are considering all their borrowing options to either pay down debt or pay for some large, unexpected expense, borrowing from their future self, so to speak, is an option.

Read that Fine Print

Of course, the first thing to do when you’re looking into the possibility of taking out a loan against money you’ve already saved into a 401(k) is to dig out the paperwork and read the fine print. There will be some details in there you’ll need to highlight or jot down, including the amount you can take out, how many times you can borrow against it and a time frame for the return (sounds like you’ve already found that it’s 5 years in your case).

If you can’t find those details, get on the phone with the HR or finance person at your employer and get clarity from them on all the terms and conditions. You want to go into this process with both eyes open.

You want to go into this process with both eyes open.

Pros and Cons

So let’s say you get comfortable with the terms you’re reading, and this will be your first time borrowing against your 401(k). A loan against your 401(k) is an attractive option because it’s readily available and relatively easy—your employer will deduct payments from your paychecks, so it’s money you won’t miss as much. For many people, the loan value you can take is pretty high, and, as you said, the interest rates tend to be good, even compared to student loans. But before you go hog-wild, you’ll want to check in with yourself on a couple of things that might be less black and white.

First, how easy will it be for you to fit your loan repayment schedule into your existing budget? How much lower will that payment be than the student loan payments you’re currently making? What will you do with that extra money? In most 401(k) loan cases, you can’t make random lump-sum payments—you’ll be stuck with the repayment schedule given. Is there a possibility you could renegotiate your student loan payments to be lower, without taking away funds from your future self?

Second, how secure is your job? What would happen if you lost your job before you fully repaid the loan? Ask those hard questions before you sign on the line.

No matter what you decide to do, always make sure you’re comfortable with the risks, have explored a variety of options to solve the root of the problem you’ve identified and have checked against your realistic budget and safety net.

Share This Advice With Your Friends and Family
More from Ask Frost
Research shows those who aren’t afraid to talk about their money questions are twice as likely to have better financial health than those who keep quiet. So, we’re collecting your questions and sharing sound advice from our bankers.
We’re Here to Help

Visit with a Frost banker for more immediate guidance on your financial life.

Give us a call at (800) 513-7678