Consumer Comeback Blog

401(k) Loan Defaults Increasing

U.S. households are defaulting on loans at an alarming rate, but it isn’t loans from banks or student loan companies that are the problems. It’s loans consumers make to themselves. A recent study from the Brookings Institution and Navigant Economics estimates finds that the amount of U.S. citizens failing to repay money borrowed from their 401(k) has mushroomed to 55 times what it was in 2007.

The study—co-authored by Robert Litan, a senior fellow at Brookings, and Hal Singer, managing director of Navigant—estimates that 401(k) loan defaults might have grown from $665 million in 2007 to nearly $37 billion. Student loan defaults total about $8 billion, reported ABC News.

While 95% of workers participating in 401(k) plans are able to borrow money from their plan the penalty for failing to repay the funds can be severe. Failure to replace the money within 60 days incurs an income tax penalty, plus a 10% charge for early-withdrawal, and the forfeiture of the tax-free compounded interest.

An additional study found that the percentage of 401(k) participants who have borrowed from their plan increased from 22.4 percent in 2005 to 27.6 in 2010, most recent figures available, and that the highest percentage of borrowers are in the 40-49 age range.