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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.

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By Aly J. Yale

Written by

Aly J. Yale

Freelance writer, Credible

Aly J. Yale is a personal finance journalist with more than 12 years of experience. Her work has been featured by Forbes, Fox Business, The Motley Fool, Bankrate, and The Balance.

Edited by Jared Hughes

Written by

Jared Hughes

Writer, Fox Money

Jared Hughes has spent more than eight years covering personal finance, with bylines at the New York Post and NewsBreak.

Updated March 21, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances.

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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.

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. But not all employers allow this, and it only applies to active 401(k) plans, not ones you still have with an ex-employer.

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 might seem equal, but isn't. Federal Direct Loans currently have rates of 5.50% to 8.05%. Financial experts say you should expect annual returns from 5% to 8% in your 401(k). The difference is that you don't have to pay tax on the money you earn in a traditional 401(k), which allows those gains to compound. If you draw it you lose that benefit . You also lose the ability to deduct student loan interest payments on your taxes, and will give up and federal benefits (on federal loans) like income-driven repayment plans and loan forgiveness.

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.

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.

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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 aren’t taxable as long as you're withdrawing contributions you've made or you're at least 59 1/2. Since you fund them with post-tax dollars — money you’ve already paid taxes on — you can withdraw contributions 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.)

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

Meet the expert:
Aly J. Yale

Aly J. Yale is a personal finance journalist with more than 12 years of experience. Her work has been featured by Forbes, Fox Business, The Motley Fool, Bankrate, and The Balance.