Despite news reports suggesting a rise in 401(k) borrowing in
recent years, we find that the share of eligible households with
401(k) loans in the 2007 Survey of Consumer Finances was about 15
percent, roughly what it has been since 1995. We find that the best
predictors of 401(k) borrowing appear to be the presence of
liquidity or borrowing constraints and the size of 401(k) balances
relative to income. Since the ongoing financial crisis has likely
caused these factors to move in opposite directions, the predicted
effect of the crisis on 401(k) borrowing is ambiguous. More
fundamentally, we find that many loan-eligible households carry
relatively expensive consumer debt that could be more economically
financed via 401(k) borrowing. In the aggregate, we estimate that
such households could have saved as much as $5 billion in 2007 by
shifting expensive consumer debt to 401(k) loans. This would
translate into annual savings of about $275 per household-roughly
20 percent of their overall interest costs--with larger reductions
for households that carry consumer debt at high interest rates or
who hold larger 401(k) balances. We posit that households might
utilize 401(k) loans less than expected due to risk-aversion,
self-control problems, and confusion about the potential gains, and
suggest better financial education that clarifies the conditions
under which 401(k) borrowing is advantageous. Finally, we note that
allowing households to repay 401(k) loans gradually even after
separation from their employers could improve household welfare by
reducing the risks of 401(k) borrowing.
General
Imprint: |
Bibliogov
|
Country of origin: |
United States |
Release date: |
February 2013 |
First published: |
February 2013 |
Authors: |
Geng Li
|
Dimensions: |
246 x 189 x 2mm (L x W x T) |
Format: |
Paperback - Trade
|
Pages: |
38 |
ISBN-13: |
978-1-288-70501-6 |
Categories: |
Books >
Social sciences >
Politics & government >
General
|
LSN: |
1-288-70501-8 |
Barcode: |
9781288705016 |
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