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Can i use retirement savings to pay student loan?

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Dear Dr. Don,
Can I pay part of my son’s federal student loan from my individual retirement account without incurring any penalties? I would appreciate your advice.

— Hans Holdout

Dear Hans,
The early distribution exception to avoid the penalty tax is for qualified higher education expenses. Using an early distribution from your IRA to pay down the loan doesn’t meet that standard, with one possible — but unlikely — exception, which I’ll get to below.

The reason this isn’t allowed is that the loan balance can easily represent expenses incurred that aren’t qualified higher education expenses. Capitalized interest would be one example. Interest expense isn’t a qualified higher education expense.

The possible exception applies if your son took out the loan during this calendar year for qualified higher education expenses that were incurred this year. The early distribution exception would allow you to take a distribution equal to those qualified expenses. This would seem to be an unusual situation. But if it is the case, you still would have to pay income taxes on the IRA distribution, even if you don’t owe the penalty tax.

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