Can You Use Your 401(k) to Pay Off Student Loans?

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Finding the cash to repay your student loans can be a challenge in difficult economic times. Your 401(k) retirement plan can be a source of funds to repay those loans. Nevertheless, if you choose to withdraw from your 401(k), the way you get the funds can bring other consequences, including the need to declare the withdrawal as income or pay early withdrawal penalties. You can borrow 401(k) funds or request a hardship withdrawal or a distribution.

Tax, Penalties and Other Considerations

If you withdraw from your 401(k) plan when you're younger than 59 1/2, you may have to claim the income on your taxes unless an exception is available under Internal Revenue Service regulations. In addition, you may also be subject to a 10 percent additional penalty tax on the early distribution because there is no exception for using 401(k) proceeds to repay a student loan. These penalties may be avoided if you borrow the funds rather than take a distribution from your 401(k) or if you qualify for a hardship distribution, but you can't avoid the negative consequence to your retirement savings that will occur when you dip into those funds early.

Hardship Distributions

Internal Revenue Service regulations permit early distributions from 401(k)s if you can demonstrate financial hardship, but you'll also be prohibited from further contributions -- both by you and your employer -- to your 401(k) and any other employer plan for six months after the distribution. To receive the hardship distribution, which cannot exceed the total amount of your elective contributions, you should have an "immediate and heavy financial need" that you can demonstrate to your employer and no other distributions under other employer plans should be available to you. Additionally, you must demonstrate that the distribution is "necessary to satisfy financial need," taking into consideration all resources available to you, including those of your spouse and minor children.


If the written policy of your 401(k) plan indicates so, you may be able to borrow from your 401(k) tax free and repay the loan over time. Internal Revenue Service guidelines specify that the loan amount must be the lesser of $50,000 or 50 percent of the vested account balance. The loan must be repaid within five years, and repayments must be made over the life of the loan at least quarterly in "substantially level payments," but isn't declared as income at the time you borrow.


If you don't qualify for a hardship distribution and your plan doesn't permit you to borrow, you can also take an early distribution. If you are under 59-1/2, you'll be subject to the 10 percent early withdrawal penalty. You will also be required to declare the distribution as income on your taxes, and the amount will be subject to a 20 percent withholding penalty.