Can I Use My 401(k) to Pay Off Student Loans? Pros and Cons

Student loan debt can feel like a heavy weight, especially when it delays major milestones. In fact, 71% of borrowers have postponed goals like buying a home because of student debt, according to a report by Gallup and Lumina Foundation.

At the same time, retirement may feel like a distant priority. That raises a tough question: Should you tap into your 401(k) to pay off student loans?

It's possible to use your 401(k) for this purpose, but doing so can come with significant trade-offs. You could face withdrawal penalties now and lose out on long-term growth that's critical for your financial future. Here's what you need to know before using your 401(k) to pay off student loans.

Current student loan refinance rates

Can you use your 401(k) to pay off student loans?

You can use your 401(k) to pay student loans in two ways: by taking an early withdrawal or borrowing through a 401(k) loan.

• Early withdrawal: This involves pulling money out of your account before reaching the retirement age, which is usually 59½. Early withdrawals can trigger income taxes and a 10% penalty, and these costs can eat into the amount you actually receive. For example, if you withdrew $30,000 to pay off $30,000 in loans, taxes, and penalties would leave you short of covering your full loan balance.
• 401(k) loan: This option lets you borrow against your vested balance without penalties or immediate taxes. You'll need to repay the 401(k) loan with interest, but those payments go back into your own account, helping restore your savings over time. However, borrowing against your 401(k) reduces your retirement growth while the money is out of the market. Most plans allow you to borrow up to 50% of your vested balance or $50,000, whichever is lower.

Risks of using your 401(k) to pay student loans

The biggest drawback of using your 401(k) funds to pay off student loans is the loss of investment growth. When you withdraw money from your 401(k), that money is no longer compounding over time, which can leave a permanent gap in your retirement savings. Even if you eventually repay the full amount, you can't make up for the lost years of growth.

“That gap is going to be multiplied exponentially larger than what you took out because that was money that was going to be invested,” says Martin Lynch, president of the Financial Counseling Association of America (FCAA).

Taxes and penalties are another concern. Early withdrawals are subject to income tax, and if the amount you take out is large enough, it could even push you into a higher income tax bracket. On top of that, most withdrawals before age 59½ come with a 10% penalty. Together, these costs can leave you with far less money to actually put toward your student loans.

401(k) loans avoid taxes and penalties as long as you repay on time. But if you default, the balance is treated as a distribution, which means taxes and penalties do apply. Another risk associated with 401(k) loans is that if you leave your job or are laid off, most plans require you to repay the loan in full within a much shorter time frame.

See Also: Fastest Way To Pay Off Student Loans in 2025

Benefits of using your 401(k) to pay off student debt

In rare situations, using your 401(k) might make sense, depending on your loan terms, retirement timeline, and overall financial picture:

• Very high interest rates: “There could be a scenario where the interest rates are very high (in the 10% to 18% range). If you are nearing the high end of this, then it might make sense even with the penalty,” says Chad Gammon, certified financial planner (CFP) and owner of Custom Fit Financial. However, he cautions, “I would rather have that person look at any refinancing options before using the 401(k).”
• Approaching retirement: If you're over age 59½, tapping into your 401(k) avoids the 10% penalty. “This would remove the 10% penalty and it could be helpful to enter retirement debt-free,” says Gammon.

Even in these scenarios, the drawbacks usually outweigh the benefits. According to Lynch, “you have to work to find a scenario where using your 401(k) is a good idea. Usually, it's not,” he says.

What alternatives should you consider first?

Before pulling money from your 401(k) and cutting into your retirement savings, consider these other options for paying off student loans:

• Employer 401(k) matching for student loan payments: Thanks to the SECURE 2.0 Act of 2022, some employers now match student loan payments as if they were retirement contributions. If you make a qualifying student loan payment, your employer can contribute the same amount to your 401(k), which can help you pay down debt while still building retirement savings..
• Refinancing to lower your interest rate: If you can qualify for a lower interest rate, refinancing could reduce your monthly payment or help you pay off loans faster. Approval depends largely on your credit and income. Keep in mind that refinancing federal loans turns them into private loans, which means giving up federal benefits and protections.
• Loan forgiveness programs: Loan forgiveness programs such as Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness wipe away remaining balances after you make a set number of qualifying payments. This can help eliminate debt without draining your retirement savings.
• Repayment assistance programs: Some states, employers, and professional fields — like health care, law, and education — offer student loan repayment assistance. These programs help cover part of your balance to reduce what you owe out of pocket.
• Increasing monthly payments: If your budget allows it, putting more toward your loans each month can reduce your principal faster and cut down on interest costs. Be sure to tell your loan servicer to apply any extra payments directly to the principal and not future scheduled payments.

How to make the best decision for your financial future

While it can feel tempting to wipe out your student loan debt, it's important to weigh the long-term consequences before dipping into your 401(k). Paying off loans may bring short-term relief, but sacrificing retirement savings can put your future security at risk. The goal is to find a balance between improving your finances now without derailing your retirement.

Start by looking closely at your situation:

• How much do you owe in student loans compared to your 401(k) balance?
• How much would a withdrawal or loan set back your retirement savings goals?
• How many years of growth would you lose if those funds weren't invested?

See Also: Should You Pay Off Student Loans or Invest?

Age also plays a role. Taking money from a 401(k) early in your career has a greater impact because you miss out on decades of compounding. And don't overlook taxes — if a withdrawal pushes you into a higher tax bracket, you'll owe more at tax time, plus the standard 10% penalty if you're under 59½.