Pros & Cons of Using Retirement Funds to Pay for College

By Samuel Becker · June 21, 2023 · 6 minute read

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Pros & Cons of Using Retirement Funds to Pay for College

In a perfect world, all parents would have a 529 plan—or another education savings account—full of funds to cover their children’s college years. But there are many reasons why that may not be the case for you. If so, you’re likely looking into other options to pay for college.

One possibility you may be considering is dipping into your retirement funds. Depending on the type of retirement account you have, you might be able to take an early withdrawal or a loan from your retirement account, which you could use to fund your child’s education.

But using your retirement funds to pay for college isn’t always the best move. Before you decide to do it, you may want to consider both the benefits and the drawbacks, as well as some potentially less costly alternatives.

Before we jump in, it’s important that you’re aware that this article is a basic, high-level overview of some potential options when it comes to using retirement funds to pay for college. Further, because these topics (taxes and investments) are complicated, none of what’s written here should be taken as tax advice or investment guidance. Always talk to qualified tax and investment professionals with questions about your retirement accounts, and never rely on blog posts (like this one) to make important financial decisions.

A Few Pros of Using Retirement Funds to Pay for College

If you already have the money saved up, there can be some upsides to taking money out of your retirement funds so that your child won’t need to take out student loans.

You May Be Able to Avoid an Early Withdrawal Penalty

If you have an individual retirement account (IRA), taking an early withdrawal typically results in income taxes on the withdrawal amount plus a 10% penalty. However, if you withdraw funds for qualified higher education expenses, the 10% penalty is waived .

That said, the withdrawn funds will still be considered taxable as income. Also, this tax break does not apply to 401(k) accounts. But if you roll over your 401(k) into an IRA, then you would be able to withdraw the funds from the IRA and avoid the penalty.

You May Be Able to Avoid Taxes Altogether

If you have a Roth IRA, you can withdraw up to the amount you’ve contributed to the account over the years without any tax consequences at all.

You’re Paying Interest to Yourself With a 401(k) Loan

In addition to allowing you to take early withdrawals, some 401(k) plans also let you borrow from the amount you’ve already saved and earned over the years.

If you borrow from a 401(k) account, that money won’t be subject to taxes the way an early withdrawal would. Also, when you’re paying that loan back, the money you pay in interest goes back into your 401(k) account rather than to a lender.

A Few Drawbacks of Using Retirement Funds to Pay for College

Before you raid your retirement to pay for your child’s college tuition, here are some potentially negative aspects to consider.

There May Be Negative Tax Consequences

Even if you manage to avoid being charged a 10% early withdrawal penalty on your retirement account, some or all of the money you withdraw from a retirement account may be considered taxable income. Depending on how much it is, you could face a larger-than-usual tax bill when you file your tax return for the year.

401(k) Loan Repayment Can Be Affected by Your Job Status

If you take out a large loan from your 401(k), then leave your job, you may be required to pay the loan in full right then, regardless of your original repayment term. If you can’t repay it, it’ll likely be considered an early withdrawal and be subject to income tax and the 10% penalty.

You May Have to Work Longer

Taking money out of a retirement account lowers your balance. But it also means that the money you’ve withdrawn is no longer working for you.

Due to compounding interest, the longer you have money invested, the more time it has to grow. But even if you replace the money you’ve taken out over time, the total growth may not be as much as if you’d left the money where it was all along.

Alternatives to Using Retirement Funds to Pay for College

Can you use retirement funds to pay for college? If you have the funds, it’s generally an option. But before you go ahead, consider these alternatives.

Scholarships and Grants

One of the best ways to pay for a college education is with scholarships and grants, since you typically don’t have to pay them back.

Check first with the school that your child is planning to attend (or is already attending) to see what types of scholarships and grants are available.

Then make sure your child fills out the Free Application for Federal Student Aid (FAFSA®). The information provided in the FAFSA will help determine his or her federal aid package, which typically includes grants, federal student loans, and/or work-study.

Finally, you and your child can search millions of scholarships from private organizations on websites like and Fast Web . While your child may not qualify for all of them, there may be enough relevant options to help reduce that tuition bill.

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Federal Student Loans

As mentioned above, filling out the FAFSA will give your child an opportunity to qualify for federal student loans from the U.S. Department of Education.

These loans have low fixed interest rates, plus access to some special benefits, including loan forgiveness programs and income-driven repayment plans.

With most federal student loans, there’s no credit check requirement, so you don’t have to worry about needing to cosign a loan with your child.

Parent PLUS Loans

If you’re concerned about the effect of student loan debt on your child, you can opt to apply for a federal Parent PLUS loan to help cover the costs of college.

Keep in mind that the terms aren’t usually as favorable for Parent PLUS loans as they are for federal loans for undergraduate students. The interest rates are currently higher, and you may be denied if you have certain negative items on your credit history.

Private Student Loans

If your child can’t get federal student loans, is maxed out on loans, or has pursued all other options to no avail, private student loans may be worth considering to make up the difference.

To qualify for private student loans, however, you and/or your child may need to undergo a credit check. If your child is new to credit, you may need to cosign to help them get approved by being a cosigner—or you can apply on your own.

Private student loans don’t typically offer income-driven repayment plans or loan forgiveness programs, but if your credit and finances are strong, it may be possible to get a competitive interest rate.

Balance Your Child’s Needs and Your Own

Using retirement funds to pay for college is one way to help your child. But you probably don’t want to risk your future financial security. Take the time to help your child consider all of the options to get the money to pay for school.

If you do decide a private student loan is the right fit, SoFi is happy to help. In the spirit of complete transparency, we want you to know that we believe you should exhaust all of your federal grant and loan options before you consider SoFi as your private loan lender. That said, we do offer flexible payment options and terms, and don’t worry, there are no hidden fees.

If you’re considering a private student loan, you can find your SoFi rate today.

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