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Q&A: Using IRA Funds to Pay Off a Student Loan

Written by Nickel - 6 Comments

A reader recently wrote in with the following inquiry:

I am looking to pay off a student loan of just under $22,000 and saw that I can borrow from my IRA to pay for school without incurring the added 10% tax penalty, would this also apply to paying off a student loan? This is a private loan not federal and my rate is around 10%, it’s adjustable. What do you think I should and can do?

The ability to use IRA funds to pay for Qualified Higher Education Expenses (QHEEs) without incurring the 10% penalty is described in Chapter 9 of IRS Publication 970. As far as I can tell, the Qualified Higher Education Expenses don’t include student loan repayment. Rather, qualified expenses include things like tuition, mandatory fees, books, supplies, equipment, and room and board. Based on that, it seems that you can’t use IRA funds to pay off your student loans (at least not without incurring the 10% penalty).

The one obvious exception to this is Roth IRA contributions (but not earnings), which can be withdrawn at any time, for any reason, without penalty. Note that I’m not saying this is a good idea, I’m just saying that it’s possible.

Also, just to clarify something from the original question… You’re not really “borrowing” when you take a qualified distribution. You’re making a withdrawal, and the only way you can put the money back in (short of sticking the money back in within 60 days) is by making regular contributions, which are subject to annual limits as well as income restrictions.

Of course, I’m not a tax expert, so it might be a good idea to run this stuff past a pro before acting on it.

This article is part of my Money Q&A Series.

Published on September 13th, 2007
Modified on April 23rd, 2009 - 6 Comments
Filed under: Education, Money Q&A, Taxes

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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6 Responses to “Q&A: Using IRA Funds to Pay Off a Student Loan”

  1. 1
    Walt Padabney Says:

    To the prior comment… unless you start real early and want to use Ed. IRA dollars for private primary education, then the better option is the 529 plan. Easier to keep control and establish and many states give a state income tax deduction on contributions… Like our friends in Oklahoma.

  2. 2
    Wayne Says:

    I agree.

    I would probably also advise the 529. Ohio also gives a state deduction (maxed at $1000 per spouse).

    Either way, the key is to save.

  3. 3
    Marsh Says:

    IRS Pub 590 page 54 states to include QHEE “paid with any of the following: …a loan…”

    Based on that, I wish we could use IRA funds to payoff or pay down a student loan. However, I’ve seen several experts state that loans from previous tax years do not qualify.

  4. 4
    dave Says:


    I have decided to pay off my sons edu.total cost of about 200,000/-.However,I am 66 yrs.old so i can withdraw it without penalty but having to pay fed.taxes.

    What should you suggest the best way to do this without losing much.



  5. 5
    Anthony Says:

    I have a 26,000.00 traditional IRA that matures 07/14/12.
    I have my son’s Education loan of 12,000.00. He went to college for two years then quit.

    I’m 53 years old, retired military, I’ll be retiring from state service (15 years)next year. I don’t want to have this student loan when I retire next year.

    I want to use part of the 26,000.00 to pay off the student loan. I’ve already made contributions of 6000.00 for this year.

    Is this a good idea? Thanks for your thoughts.

  6. 6
    Matt Says:

    Unless of course – the only way to get a qualified disbursement is to have it paid directly to the school while you are enrolled.

    hmm. need to figure this out – I have a small chunk of money sitting in an IRA that I would like to get out since it is not growing at all – but don’t want to take the hit needlessly – could roll it over perhaps – but would be better to wipe out most of the student loan without the tax penalty

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