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If you’re trying to eliminate student debt, taking money from your 401(k) can seem like a good option. Instead of just permanently withdrawing the money, you can use a 401(k) loan instead. Here’s how it works.
A 401(k) loan lets you borrow money from your own retirement plan and pay it back to yourself. As with other loans, like online loans, you have to pay interest on the loan (usually equal to standard bank loan rates). However, with a 401(k) loan you pay the interest to yourself into your 401(k).
You can opt for a maximum repayment period of five years. If you repay the loan on time, you don’t pay any taxes on the amount you borrowed or the 10% penalty for withdrawing from a retirement account before age 59.5. If you don’t repay the loan, the unpaid balance is treated as a premature retirement distribution.
There are several potential benefits to taking out a 401(k) loan to pay off your student loans.
There are a few possible downsides to a 401(k) loan.
So what should you do? It depends on how the advantages and disadvantages line up with why you want to pay off your student loans faster.
If you choose not to take out a 401(k) loan, there are other simple alternatives for paying off your student loans. For example, refinancing your student loan can be a simple process. Our review of the top student loan refinancing companies is a great way to get started eliminating your student loan debt.