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Borrowing from Yourself: The Determinants of 401(k) Loan Patterns

  • Timothy Jun Lu

    (The Wharton School)

  • Olivia S. Mitchell

    (The Wharton School)

This paper explores the determinants of people’s decisions to take 401(k) loans. We argue that 401(k) plans do not simply represent retirement saving, but they also provide a means of saving for precautionary purposes. We model factors that rationally would induce people to borrow from their pension plans, and we explain why people do not often use 401(k) loans to replace their more expensive credit card debt. Next we test our hypotheses using a rich dataset and show that people who are liquidity-constrained are more likely to have plan loans, while the better-off take larger loans when they do borrow. Plan characteristics such as the number of loans allowed also influence borrowing and loan size in interesting ways, while loan interest rates have only a small impact.

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File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp221.pdf
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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp221.

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Length: 33 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:mrr:papers:wp221
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  1. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc.
  2. Julie Agnew & Pierluigi Balduzzi & Annika Sundén, 2003. "Portfolio Choice and Trading in a Large 401(k) Plan," American Economic Review, American Economic Association, vol. 93(1), pages 193-215, March.
  3. repec:crr:crrwps:2000-12 is not listed on IDEAS
  4. Choi, James J. & Laibson, David & Madrian, Brigitte C., 2004. "Plan Design and 401(k) Savings Outcomes," National Tax Journal, National Tax Association, vol. 57(2), pages 275-98, June.
  5. Love, David, 2006. "Buffer stock saving in retirement accounts," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1473-1492, October.
  6. Martin Browning & Thomas F. Crossley, 2001. "The Life-Cycle Model of Consumption and Saving," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 3-22, Summer.
  7. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2002. "For Better or For Worse: Default Effects and 401(k) Savings Behavior," JCPR Working Papers 256, Northwestern University/University of Chicago Joint Center for Poverty Research.
  8. Melvin Stephens, 2008. "The Consumption Response to Predictable Changes in Discretionary Income: Evidence from the Repayment of Vehicle Loans," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 241-252, May.
  9. James M. Poterba & Steven F. Venti & David A. Wise, 1993. "Do 401(k) Contributions Crowd Out Other Persoanl Saving?," NBER Working Papers 4391, National Bureau of Economic Research, Inc.
  10. Geng Li & Paul A. Smith, 2008. "Borrowing from yourself: 401(k) loans and household balance sheets," Finance and Economics Discussion Series 2008-42, Board of Governors of the Federal Reserve System (U.S.).
  11. Love, David A., 2007. "What can the life-cycle model tell us about 401(k) contributions and participation?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 6(02), pages 147-185, July.
  12. Ian Ayres & Barry J. Nalebuff, 2008. "Life-cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk," NBER Working Papers 14094, National Bureau of Economic Research, Inc.
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