jpel174911 , it's a common myth that the loan is being paid back with post-tax funds. Only the interest paid on the loan comes from post-tax money. The loan principal itself is paid back with the pre-tax funds that you were loaned and the money that is coming out of your post-tax pay is simply replacing the pre-tax money that was spent. Having the payments taken out of your paycheck instead of out of exact dollars bills that you were loaned just moving your cash around; money is fungible. If you didn't pay back the loan, the outstanding pre-tax principal would become taxable.
Consider this: If you took a 401(k) loan, put the money in your pocket, then immediately repaid the loan, you would be right back where you started whether the money you used to pay back the loan came from your pocket or from your paycheck.
