Borrowing from Tomorrow: 401(k) Loans and Repayment Behavior

Abstract: 
The proposed research seeks to investigate the determinants of borrowing and repayment patterns from 401(k) pension plans. In this pilot project, we seek to assess how employee and plan characteristics affect the propensity to take these loans, the likelihood of repaying them, and how large the loans are when people take them. The economic life-cycle model predicts that younger people will be more likely to take loans as they are more credit-constrained. 401(k) loans are particularly attractive since they tend to be available through the employer and do not require a credit check; they are also available on a tax-preferred basis as the contributions are pre-tax and the loan is pre-tax. However, if the employee does not make payments according to the plan regulation, the outstanding loan balance is considered as defaulted, and is subjected to normal taxation plus 10% penalty tax. Our objective is to produce a working paper which investigates the type of people who take loans; we will also explore how large the loans are, how often people take them, and what characterizes repayment patterns. This will provide insight regarding who takes loans and will help predict default rates of these loans. This will lay the groundwork for future explorations of how 401(k) loans shape eventual retirement wealth.
Funded By: 
Boettner
Award Dates: 
July 1, 2008 - June 30, 2009
PARC Grant Year: 
Year 15