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401(K) LOANS and HOUSEHOLD BALANCE SHEETS

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  • Li, Geng
  • 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.

Suggested Citation

  • Li, Geng & Smith, Paul A., 2010. "401(K) LOANS and HOUSEHOLD BALANCE SHEETS," National Tax Journal, National Tax Association;National Tax Journal, vol. 63(3), pages 479-508, September.
    • Handle: RePEc:ntj:journl:v:63:y:2010:i:3:p:479-508
    DOI: 10.17310/ntj.2010.3.04
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    Cited by:

    1. Bronshtein, Gila & Scott, Jason & Shoven, John B. & Slavov, Sita Nataraj, 2020. "Leaving big money on the table: Arbitrage opportunities in delaying social security," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 261-272.
    2. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2011. "The Availability and Utilization of 401(k) Loans," NBER Chapters, in: Investigations in the Economics of Aging, pages 145-172, National Bureau of Economic Research, Inc.
    3. Brennan, Linda & Zevallos, Zuleyka & Binney, Wayne, 2011. "Vulnerable consumers and debt: Can social marketing assist?," Australasian marketing journal, Elsevier, vol. 19(3), pages 203-211.
    4. Geng Li, 2012. "Gamblers as personal finance activists," Finance and Economics Discussion Series 2012-18, Board of Governors of the Federal Reserve System (U.S.).

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