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Can I Use a 401(k) to Pay off Student Loans?

You can use 401(k) funds to pay off student loans, but it usually isn’t a smart idea. You may owe a penalty and lots of taxes on the amount you withdraw.

Aly J. Yale Aly J. Yale Edited by Jared Hughes Updated October 28, 2022

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as "Credible."

If you’re struggling to pay off your student loans, pulling funds from your 401(k) account may be an option. But it could cost you quite a bit in the long run — both in penalties and investment losses.

Here’s what you need to know before you use a 401(k) to pay off student loans:

  • Can I withdraw from my 401(k) to pay off student loans?
  • What are the risks of withdrawing from a 401(k)?
  • Additional options to pay off student loans
  • Can I use an IRA to pay off student loans?
  • Other ways to pay off student loans sooner

Can I withdraw from my 401(k) to pay off student loans?

You can withdraw money from your 401(k) and put it toward your student loan balances, but expect some limitations.

First, you can only pull money from the vested portion of your 401(k) — the part you actually own. Your vested portion will depend on your employer’s plan and how long you’ve been with the company. Check with your HR department or plan administration for guidance.

You should also consider the disadvantages that come with withdrawing funds from your 401(k). If you decide to take money out, you’ll owe federal income taxes on the amount you withdraw. So, if you’re in the 24% tax bracket and take out $50,000, you’ll pay $12,000 in taxes.

Additionally, if you’re under age 59 ½, you’ll owe a 10% penalty for withdrawing from your 401(k) early. The only exception to this is called the rule of 55. This lets you avoid the 10% penalty if you’ve left your job and are 55 or turning 55 in the current calendar year.

Check Out: How to Pay Off $100K in Student Loans

What are the risks of withdrawing from a 401(k)?

The penalties and taxes you’ll owe are just the short-term drawbacks of withdrawing money from your 401(k) too early. In the long run, you have to consider other risks as well, including:

  • You’ll have less money for retirement. Not only are you taking funds out of your account, but you’re also reducing the amount that can be invested (and grow, thanks to compounding interest). This could mean a lot less saved by the time you retire.
  • The rate of return probably isn’t equal. The typical 401(k) saw an almost 15% gain in 2021, according to Mid Atlantic Capital Group. Paying off your student loans is unlikely to save you an amount equal to those gains. Federal Direct Loans, for example, have rates of just 4.99% to 7.54% as of July 2022. Private student loan rates, while higher, are usually well below that 15% mark, too.

Before you use your 401(k) to pay off student loans, make sure you use a good student loan repayment calculator to understand the potential impact.

Estimate how long it’ll take to pay off your student loan debt using the calculator below. You can also use the slider to see how increasing your payments can change the payoff date.

Enter loan information

? Enter the remaining balance of your loans $
? Enter the average annual interest rate of your loans %
? Enter the amount of time left to repay your loan years

+ $0
Total Payment $
Total Interest $
Monthly Payment $

If you increase your payments by $ monthly on your $ loan at %, you will pay $ a month and pay off your loan by Jan 2021.


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Checking rates won’t affect your credit score.

Additional options to pay off student loans

Tapping your 401(k) isn’t your only option if you’re having trouble paying off your student loans.

If you’re dealing with financial hardship, consider these other options. Please note: most of these options only apply to federal student loans.

  • Seek deferment or forbearance. Deferment and forbearance allow you to reduce or delay your payments temporarily. The difference between the two lies in how interest accrues. On a deferment plan, you won’t be charged any extra interest while your payments are on pause. With forbearance plans, your loan continues to accrue interest.
  • Enroll in an income-driven repayment plan. Income-driven repayment (IDR) plans adjust your monthly payment to suit your income level.The U.S. Department of Education offers four types of IDR plans, but most require you to pay just 10% of your monthly discretionary income. Sometimes, your payment may even be zero.
  • Apply for loan forgiveness. In some cases, student loan forgiveness programs may eliminate your remaining student loan balance. This might be possible if you’re a teacher or another type of public employee or your school closed while you were enrolled.
  • Rehabilitate your loans. This is an option if your student loans have gone into default. You’ll typically need to pay 15% of your discretionary income to rehabilitate your loan.
  • Consolidate your federal loans. Consolidating your federal loans into a Direct Consolidation Loan is when you combine multiple loans into one.
  • Refinance your loans. This may reduce your interest costs and make it easier to make payments.

You should also contact your loan servicer. They can walk you through options that might help in your specific situation.

Learn More: Income-Driven Repayment: Which Plan Should You Choose?

Can I use an IRA to pay off student loans?

If you have a Roth IRA, that may be a better option for paying off your student loans than a 401(k). With these accounts, you won’t pay a penalty as long as you only withdraw an amount equal to or lesser than your total contributions.

Keep in mind: If you withdraw the earnings of your account, you’ll owe a penalty — 10%, same as 401(k)s.

Roth IRA withdrawals also aren’t taxable. Since you fund them with post-tax dollars — money you’ve already paid taxes on — you can withdraw them tax-free at any time.

Despite these advantages, pulling from your Roth IRA means less money — and less growth — when it comes time for retirement. Additionally, not everyone is eligible for a Roth IRA. For example, if you’re single and make $144,000 annually or more, you wouldn’t be eligible to contribute to one. For married couples who file their tax returns jointly, the threshold is $214,000.

Check Out: 7 Ways to Lower Your Student Loan Interest Rate Now

Other ways to pay off student loans sooner

If you’re hoping to pay off your loans faster, refinancing them — replacing them with a new loan that has a lower interest rate or better repayment terms — may help.

If you choose this option, shop around for your lender, as rates and terms can vary widely. You should also use a student loan refinancing calculator to get an idea of what refinancing might mean for your monthly payment and payoff timeline. (You might be surprised at the difference it can make.)

Step 1. Enter your loan balance

? Enter the remaining amount of the loans you’d like to refinance $

Step 2. Enter current loan information

? Enter the average annual interest rate of the loans you’d like to refinance %
? Enter the monthly amount you currently pay on your loans (or enter remaining term) $
? Enter the amount of time left to repay your loan (or enter monthly payment) years

Step 3. Enter your new loan information to start calculating your savings

? Enter an estimated new interest rate. %
? Enter the monthly amount to pay on your new loan (or enter new loan term) $
? Enter the amount of time you have to repay your loan (or enter monthly payment) years
Lifetime Savings Increased Lifetime Cost $
New Monthly Payment $
Monthly Savings Increased Monthly Cost $

If you refinance your student loan at % interest rate, you can save will pay an additional $ monthly and pay off your loan by . The total cost of the new loan will be $.


Does refinancing make sense for you?
Compare offers from top refinancing lenders to determine your actual savings.

Check Personalized Rates
Checking rates won't affect your credit score

Finally, make it a point to send an extra payment or two whenever possible, as this reduces your principal balance and the amount of interest your loan accrues. A good option is to put your tax refund toward your loans. Using any holiday bonuses, inheritances, and other windfalls is smart, too.

See More: 11 Strategies to Pay off Student Loans Faster

About the author
Aly J. Yale
Aly J. Yale

Aly J. Yale is a mortgage and real estate authority. Her work has appeared in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.

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