Edmit logo

Should I Withdraw from My 401k to Pay My Tuition?

Featured Stories

Filter By Categories

If you received your financial aid award, and the offer doesn’t cover your expenses, withdrawing from your 401k may seem like a favorable option compared to a private student loan. While it is possible to withdraw from your 401k to pay college tuition, you may face penalties, taxes, and a reduced financial award as a result. Here’s how:

Proving Hardship

Before considering if you can withdraw from your 401k, review your employer’s 401k policy. Some companies require you to show proof of hardship before obtaining access to your 401k. In addition to providing bank statements and other evidence of hardship, you will also be required to demonstrate how you have exhausted all other options.

Early Withdrawal Penalty

Unless you are 59½, withdrawing money from your 401k automatically results in an early withdrawal penalty. In addition to the money you are withdrawing from tuition, you may lose thousands of dollars in penalty fees. Taking all fees into account, will you be able to afford retirement with an early withdrawal?


Tax Penalty

If you make an early withdrawal from your 401k,  it’s viewed as income, even if the funds will be used for school. The money will be reported as taxable income to the IRS and can increase the amount of taxes due. With the increase in income, you may also face other challenges to your financial situation.

Increased Income, Reduced Financial Aid

If your 401k withdrawal is marked as income, your financial aid award could change in subsequent years. You may no longer qualify for grants, work-study, or even certain loan programs. Even if every penny of your withdrawal will be used for school, the increase in income may still reduce your financial aid award in subsequent years.

Inability to Make New Contributions

Some 401k policies outline restrictions after making a withdrawal. You may have to wait as long as six months before adding funds to your 401k after an early disbursement.  


Taking a Loan From Your 401K

Because of the penalties of withdrawing from a 401k,  you may consider borrowing from your 401k. The benefit of taking a loan from your 401k is that you are not subject to early tax penalties, hefty taxes, and other restrictions. However, 401k loans have their own unique set of restrictions.

Borrowers have five years to pay back a 401k loan, no exceptions. In addition, if you leave your employer before the loan is paid off, the full balance of the loan is due immediately. In the event you cannot pay back the loan, the loan can be converted to withdrawal, at which time early withdrawal penalties, taxes, and other fees are due.

Alternatives to Using Your 401k

Whether you just received your financial aid award or are funding the third year of college, you do have alternatives to withdrawing from your 401k at every stage of the process.

Appeal Your Financial Aid Award

If you haven’t yet agreed to your financial aid award, consider writing a financial aid appeal letter. Present documentation to prove hardship and request additional aid in the form of stipends, scholarships, grants, or loans from the university. Keep in mind that some students will turn down financial aid, which will increase the amount of aid available. It’s important to file an appeal early.

Private Student Loans

If you have exhausted savings, 529 College Savings Plans, and financial aid awards, you may consider a private student loan. As a parent of a college-age student, you may be considering retirement in the next 15-20 years. On the other hand, your child will have more time left in the workforce both to pay their student loan and contribute to a 401k of their own. If withdrawing from a 401k will hinder your ability to retire, it’s better to consider alternatives.

Should I Borrow from My 401k to Pay My Tuition?

Borrowing from a 401k to pay for tuition comes with many pitfalls, especially if you are subject to early withdrawal penalties. Before withdrawing from a 401k, it’s important to examine other funding alternatives.  The first option should be to discuss your financial aid award with the college or university.

Sign up for updates

Popular Tags

Financial Aid and Scholarships* paying for college financial aid Cost of College* grants and scholarships FAFSA Student Loans* Saving for College* federal student loans college tuition cost of attendance 529 plan college financial planning financial aid award expected family contribution private student loans taxes room and board college savings plan on-campus housing college applications application fees merit-based financial aid private universities public universities student loan assistance college expenses federal financial aid merit scholarships Salary and Career* budgeting for college edmit hidden gems tuition discount financial need parent PLUS loan southern colleges CSS profile college costs edmit team education expenses living expenses western colleges financial aid appeal income midwestern colleges off-campus housing affordable college college majors loan forgiveness northeast colleges application fee waivers degree programs edmit scholarship institutional aid loan repayment new england colleges choosing a major net price prepaid tuition plans work-study SAT career choosing a college in-state tuition international students need-based financial aid need-blind colleges private scholarships qualified higher education expenses repayment plans tuition guarantee 401k ACT UGMA UTMA budget college ranking systems discretionary income education savings accounts fees free tuition full ride scholarship grants great lakes region colleges health insurance options investment ivy league schools meal plans mid-east region colleges need-aware colleges plains region colleges rocky mountain schools southeastern colleges southwestern colleges student loan debt tuition payment plans 568 presidents group Inversant MEFA applying to college asset protection allowance best price campus life college advisor college deposit college search college spending concurrent enrollment cost by region cost by state crowdfunding educational expenses esports fee waivers financial literacy fraternities and sororities full tuition gap year home equity loan income share agreements internships liberal arts degree line of credit medical expenses military benefits out-of-state students out-of-state tuition percent need met private college consultant retirement savings saving school-based scholarships small business standardized testing state aid state schools student bank accounts student organizations title IV schools travel expenses tuition decreases tuition increases tuition reciprocity undocumented students