Q&A: Using IRA Funds to Pay Off a Student Loan
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The one obvious exception to this is Roth IRA contributions (but not earnings), which can be withdrawn at any time, for any reason, without penalty.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.




Hello!
You are correct. Qualified Higher Education Expenses (QHEE) do not include repayment of student loans.
I would recommend establishing Education IRAs before children reach 18. You can enjoy tax free and penalty free benefits on earnings and withdrawals when they are used to pay for QHEE expenses.
-Raymond
Comment by MONEY BLUE BOOK — Sep 13th 2007 @ 2:26 pmTo 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.
Comment by Walt Padabney — Sep 13th 2007 @ 9:15 pmI 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.
Comment by Wayne — Sep 14th 2007 @ 4:29 pmIRS 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.
Comment by Marsh — Jun 4th 2008 @ 9:53 am