Can I use a 401(k) to pay off student loans?

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If you’re struggling to repay your student loans, withdrawing funds from your 401(k) account may be an option. But it could cost you in the long run, both in penalties and in investment losses.

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

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

You can withdraw money from your 401(k) and apply it to your student loan balance, but expect some limitations.

First, you can only withdraw money from the vested portion of your 401(k) – the portion you actually own. Your portion earned will depend on your employer’s plan and the length of your career with the company. Check with your human resources department or plan administration for advice.

You should also consider the inconveniences of withdrawing funds from your 401(k). If you decide to withdraw money, you will have to pay federal income taxes on the amount you withdraw. So if you’re in the 24% tax bracket and you withdraw $50,000, you’ll pay $12,000 in taxes.

Also, if you are under age 59.5, you will incur a 10% penalty for withdrawing your 401(k) early. The only exception to this rule is called the 55 year rule. This allows you to avoid the 10% penalty if you left your job and turned 55 or turned 55 in the current calendar year.

Check: How to repay $100,000 in student loans

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

The penalties and taxes you’ll have to pay are just the short-term inconvenience of withdrawing money from your 401(k) too soon. In the long term, you also need to consider other risks, including:

  • You will have less money for retirement. Not only are you withdrawing funds from your account, but you’re also reducing the amount that can be invested (and growing, thanks to compound interest). That could mean a lot less savings when you retire.
  • The rate of return is probably not equal. The typical 401(k) saw a nearly 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 earnings. Federal direct loans, for example, have rates of just 4.99% to 7.54% in July 2022. Private student loan rates, while higher, are generally well below that 15% mark.

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

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

Enter loan information

Full payment

Total interest

Monthly payment

If you increase your payments by

monthly on your

ready to
%you will pay

per month and repay your loan in
Jan 2021.

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Checking rates will not affect your credit score.

Additional options for repaying student loans

Using your 401(k) isn’t your only option if you’re having trouble repaying your student loans.

If you are facing financial difficulties, consider these other options. Note: Most of these options only apply to federal student loans.

  • Seek adjournment or abstention. Deferment and forbearance allow you to reduce or temporarily delay your payments. The difference between the two is in how interest accrues. With a deferral plan, you won’t be charged any additional interest while your payments are paused. With forbearance plans, your loan continues to earn interest.
  • Sign up for an income-driven repayment plan. Income-contingent repayment (IDR) plans adjust your monthly payment based on your income level. Sometimes your payment may even be zero.
  • Request loan forgiveness. In some cases, student loan forgiveness programs can eliminate the remaining balance of your student loan. This may be possible if you are a teacher or some other type of public employee or if your school closed while you were enrolled.
  • Rehabilitate your loans. This is an option if your student loans are in default. You will usually have to pay 15% of your discretionary income to rehabilitate your loan.
  • Consolidate your federal loans. Consolidating your federal loans into a direct consolidation loan involves combining several loans into one.
  • Refinance your loans. This can lower your interest charges and make payments easier.

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

Learn more: Reimbursement based on income: which plan to choose?

Can I use an IRA to pay off student loans?

If you have a Roth IRA, this 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 less than your total contributions.

Keep in mind: If you withdraw income from your account, you will owe a penalty – 10%, the same as 401(k)s.

Roth IRA withdrawals are also not taxable. Since you’re funding them with after-tax money — money you’ve already paid taxes on — you can withdraw them tax-free at any time.

Despite these benefits, drawing from your Roth IRA means less money — and less growth — when you retire. Also, not everyone is eligible for a Roth IRA. For example, if you are single and earn $144,000 per year or more, you would not be eligible to contribute to one. For married couples filing jointly, the threshold is $214,000.

Check: 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 with a lower interest rate or better repayment terms — can help.

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

Step 1. Enter your loan balance

Step 2. Enter Current Loan Information

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

Lifetime savings
Lifetime Cost Increase

New monthly payment

Monthly savings
Increase in monthly cost

If you are refinancing your student loan at
interest rate, you
can save
will pay extra

monthly and repay your loan in
. The total cost of the new loan will be

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

View custom pricing
Checking rates won’t affect your credit score

Finally, be sure 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 allocate your tax refund to your loans. The use of holiday bonuses, inheritances and other windfalls is also smart.

Learn more: 11 Strategies to Pay Off Student Loans Faster

About the Author

Aly J. Yale

Aly J. Yale is a mortgage and real estate authority. His work has been published in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, etc.

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