Should I Use My IRA to Pay My Student Loan?

by Andy Hough on January 29, 2016

studentloanpayoffLast year I had a total student loan balance of about $138,000. After paying over $19,000 towards that student loan last year I currently have a balance of just over $126,000. That is just a $12,000 reduction. The other $7000 I paid went to interest. It is tough to make much headway on this loan since it incurs about $600 in interest every month.

Other than the money that went to medical bills I used all of the settlement money from my accident to pay down my student loan. If I wouldn’t have had that small windfall I would have made very little progress on paying down my loan last year. It is unlikely I will get another windfall. That is why I’m looking for other large chunks of money to pay down my student loan. The only large chunk of money I have are my IRAs.  I have about $30,000 in my IRAs which if I were able to apply the total amount to my student loan would at least allow me to get it under six figures. There would still be a lot left to pay but it would result in a decent amount of interest savings.

I have a traditional IRA with about a $20,000 balance. A big problem with using the traditional IRA to pay down my student loan is that I would have to pay a 10% early withdrawal penalty and income tax on the amount I withdrew.  That alone is enough to keep me from using the traditional IRA to pay my student loan.

I also have a Roth IRA with a little over $9000.  Since I have had the IRA for over five years I could withdraw my contributions – but not my earnings – and not have to pay the 10% early withdrawal penalty. The contributions were already tax and thus the withdrawal wouldn’t be considered income and subject to tax.  My Roth IRA doesn’t have any earnings since it has lost money so I’d be able to withdraw the entire amount without paying the penalty. This amount wouldn’t make a big reduction in my loan. As I’m almost 50 years old I wouldn’t have a lot of time to rebuild my retirement savings. An additional $9000 probably isn’t going to be much help when I’m retired but it would be better than nothing.

What do you think I should do?

{ 10 comments… read them below or add one }

1 Jon January 29, 2016 at 5:57 pm

I would leave the IRA alone and look for ways to increase income. I love how it feels when I pay off debt, and can’t wait for the day when everything is paid off completely. Just the good feeling I get motivates me and keeps me forging ahead. Can you get another job to help pay down the balance?

2 anon January 30, 2016 at 1:58 pm

Too risky. I too would look for ways to increase your income.

3 Cindy Brick January 30, 2016 at 3:10 pm

I’d use the IRA that won’t penalize you, but leave the $20,000 one alone. That way, you’ve got an emergency fund you can use as well, if you absolutely have to. Lose 10% as a penalty? That just doesn’t make sense.

Another job, particularly if you can slot it primarily toward payment of the student loan, would be a better fit, even if it’s a temporary one. I would think the tax prep people would leap at someone with your experience.

4 Andy Hough January 30, 2016 at 6:57 pm

Leaving the IRA alone and finding a job or another way to increase my income is what I’ll most likely do.

5 Andy Hough January 30, 2016 at 6:58 pm

That is what I’m thinking.

6 Andy Hough January 30, 2016 at 7:01 pm

Dedicating one or more sources of income to the student loan is a good idea. I already put all my blog income towards my student loan, but I don’t have much blog income anymore. I need to get a job or find another way to increase my income.

I don’t think I’ll use the IRA to pay down my student loan at this time. If I am able to increase my income and start making significant progress on paying down the loan I might use the IRA to speed up the progress.

7 Aaron February 1, 2016 at 6:10 pm


I think that is a good idea. You might try DST or Cerner. I worked at DST for 20 year and hated almost every minute of it, but made pretty good money and I am thankful I did it. They would also find your law degree a plus I’m sure.
You seem to do a great job at living frugally so an increase in income and living the same lifestyle will really accelerate the student loan payoff. If you do increase your income I would keep the IRA accounts. Dividend income can be generated with the $30,000.00 you already have in your IRA. Once the student loan is payed, you can take those dividends to pay 10%-15% of your living expenses even after paying a penalty.

Just a thought. Good Luck!

8 Andy Hough February 3, 2016 at 11:10 am

Aaron – Thanks for the advice. I’ll keep those companies in mind. I didn’t really think about applying to them since they aren’t legal related, but maybe the law degree will still help.

9 Cindy Brick February 3, 2016 at 11:16 pm

One more thought…how about working in a program that forgives part or all of those student loans — like the Peace Corps?
Husband and I are considering this. They have short-term opportunities, besides the two-year commitment.

10 Andy Hough February 7, 2016 at 1:42 pm

The Peace Corps is something I have considered, but I’m not ready to do the two-year commitment. I’ll look into the short-term programs. It takes 10 years of working for a non-profit or government to have my loans forgiven. I’d have to do several terms in the Peace Corps or work at a non-profit or government agency after the Peace Corps in order to get my loans forgiven.

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