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401(K) LOANS and HOUSEHOLD BALANCE SHEETS

Li, Geng and Smith, Paul A.

Abstract:

We show in a simple model that households will choose 401(k) loans over other consumer loans if the opportunity cost of 401(k) loans — i.e., the foregone asset returns — is less than the cost of other loans, and that few households would carry high-cost consumer debt without first utilizing 401(k) loans. Using data from the Survey of Consumer Finances, however, we find that households typically turn to 401(k) loans only after utilizing more expensive credit. About half of our sample households could benefit from shifting debt to 401(k) loans, generating average savings of about $200 to $275 per year, or 10 to 15 percent of interest costs.

Citation

Li, Geng and Smith, Paul A. (2010), 401(K) LOANS and HOUSEHOLD BALANCE SHEETS, National Tax Journal, 63:3, pp. 479-508

DOI: dx.doi.org/10.17310/ntj.2010.3.04