Tags: 401k | Loan | Defaults | billions

Study: Americans Losing Billions as 401(k) Loan Defaults Rise

By    |   Thursday, 19 July 2012 08:16 AM

Many Americans are borrowing money against their 401(k)s and are having a hard time paying the loans back, new research shows.

The study was conducted by Robert Litan, a researcher at the Brookings Institution, and Hal Singer, managing director of financial analysis firm Navigant Economics, and showed that defaults on 401(k) loans may be as high as $37 billion a year.

The default rate between July 2011 and May 2012 was 17.4 percent. That compares with a default rate of less than 10 percent in the 12-month period ended June 2008, which preceded the depths of the recession.

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The study found that rising unemployment is correlated with a subsequent increase in defaults on 401(k) loans.

As the economy tanked, more people turned to retirement savings to cover debt and living expenses. Many of those people had either already lost their jobs or lost their jobs before they repaid their loans.

This year, 35 percent of displaced workers have taken money from their retirement savings, USA Today reported.

The mounting financial problems that drive people to borrow from their retirement savings are also often the same reasons that they default. And doing so is costly.

When a participant with an outstanding 401(k) loan loses their job, the full loan comes due within 60 days, CNNMoney explained.

If the participant defaults on the loan, the amount of the loan is deducted from the 401(k) account. The amount withdrawn is also subject to income tax, and typically a penalty of 10 percent of the loan amount is charged if the default resulted from job loss.

Many of the individuals defaulting on these loans, and thus losing significant amounts of their savings, are baby boomers who have less time to rebuild their retirement fund.

“[T]his is happening to people at the very worse times of their personal and financial lives,” Singer told CNNMoney.

Editor's Note: The Final Turning Predicted for America. See Proof.

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Thursday, 19 July 2012 08:16 AM
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