Financial Advice

Should I Take a 401(k) Loan to Payoff My Parent PLUS Student Loans?

Question:

Dear Steve,

I have a balance of approx. $35,000 of parent plus loans that I have taken for three children in college.

Interest rate is 8.125%. Balance does not move much due to daily interest. Should I take a 401K loan to pay off.

I am 57, I’ll be dead and gone before this gets paid off.

Sabrina

Answer:

Dear Sabrina,

I would absolutely suggest NOT taking out a 401(k) loan. With the prognosis for the stock market and the anticipated rates of return a 401(k) loan would cost you the interest you would pay yourself plus the lost return while that money was out of your account. For example, a 4% interest rate on a 401(k) loan to yourself while the stock market is returning 10% is actually a cost of 14% on that borrowed money.

If your income is changing or the payment is unaffordable then look at consolidating the Parent PLUS loans and drop them into an Income Contingent Repayment plan. This approach may lower your payment, will extend the amount of time you will pay, and may increase the balance to be forgiven in 25 years. See this page.

“This plan is the only available income-driven repayment option for parent PLUS loan borrowers. Although PLUS loans made to parents can’t be repaid under any of the income-driven repayment plans (including the ICR Plan), parent borrowers may consolidate their Direct PLUS Loans or Federal PLUS Loans into a Direct Consolidation Loan and then repay the new consolidation loan under the ICR Plan (though not under any other income-driven plan).”

And while the solution is not perfect, it is certainly better than robbing your retirement now and losing your return on that money.

Steve Rhode
Get Out of Debt GuyTwitter, G+, Facebook

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This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.

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