Add The New York Post on Google The SECURE 2.0 Act allows employers to match student loan payments to 401(k)s, but few offer it. Student loan expert and founder of The College Investor, Robert Farrington, warns against raiding 401(k)s due to penalties and lost growth. Consider the Repayment Assistance Plan or Public Service Loan Forgiveness instead of touching retirement. Many student loan borrowers find themselves on the horns of a dilemma: Your employer offers a 401(k) match, which is part of your compensation, but you also have to pay off student loans. How much should you allocate to each?
After a few years of great stock returns, your 401(k) might look a lot better than your student loan balance. It’s tempting in this situation to raid your retirement savings in order to get out from under a burden of debt. But is that a wise idea?
The Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0) was a major piece of legislation passed during the Biden administration that contained over 90 provisions designed to make saving for retirement easier, more accessible and flexible. One of them is the 401(k) student loan match.
With this law, your employer can match your qualified student loan payments with a contribution directly into your retirement account, helping you pay down debt without missing out on your employer’s retirement match.
Unfortunately, according to the PSCA, a national non-profit trade association that supports employers who provide employer-sponsored retirement plans, uptake on this program has been slow. As of the end of 2024, only 1.9% of 401(k) plans had implemented a student loan match.
Larger plans were more likely to offer the match: 5.7% of plans with 1,000 or more participants had a student loan match.
If your 401(k) balance has been growing faster than your student loan balance has been shrinking, you may be tempted to withdraw money from your retirement account to pay down your debt.
Before you raid the future for the sake of the present, know that taking money out of your 401(k) is difficult for a reason.
Penalties for early withdrawal Withdrawing from your 401(k) before you’re 59.5 years old can trigger a 10% penalty fee. Plus, you’ll likely have to pay ordinary income taxes on the distribution, as well as state taxes if you’re subject to them.
“It’s honestly not something that you should consider,” says Robert Farrington, student loan expert and founder of The College Investor.
Besides losing money to penalties and taxes, you’ll also miss out on the investment earnings you could have made by keeping your money in your 401(k). The longer your money stays invested, the more you can earn due to compound interest.
“Student loan debt can feel like a burden, but it’s better to save for your future and let your money grow and compound than to pull out your money early to pay off your loans,” says Farrington. By withdrawing from your 401(k) early, you’ll miss out on this compounding interest effect and have less money saved when you want to retire.
There are a few exceptions to these rules. If you have a Roth 401(k), you can withdraw your contributions fee- and tax-free anytime (since you already paid taxes on the amount). Withdrawing your earnings early, however, will trigger a penalty.
For a traditional 401(k), individuals who are 55 or about to turn 55 and have left their job can withdraw without the 10% penalty in some cases. This is known as the Rule of 55.
If you’re facing a financial emergency, you may be able to take a hardship withdrawal from your 401(k) without incurring the 10% penalty. However, you’ll still have to pay income taxes on the amount you take out.
The IRS allows hardship withdrawals for “an immediate and heavy financial need.” In some circumstances, you could use your 401(k) hardship withdrawal to pay for college tuition. Medical expenses or an imminent home foreclosure also usually qualify.
However, you can’t take a hardship withdrawal to repay student loans. Even if you’re struggling to keep up with your monthly payments, you’ll have to look to alternative strategies to ease the burden.
Withdrawing from your 401(k) before you’re 59.5 is tricky due to penalties and taxes. However, some employers give you the option of borrowing from your account with a 401(k) loan.
If your employer permits it, you could take out a loan of up to 50% of your vested balance or $50,000, whichever is less. You won’t pay taxes or a withdrawal penalty, but you’ll have to pay back what you borrowed plus interest, usually within five years. The loan interest you pay will go into your 401(k), helping offset your lost earnings.
However, borrowing from your 401(k) could still endanger your overall return on investment. For example, if you pay a low-interest rate on your 401(k) loan, you may have been able to earn more by leaving the money invested instead.
More worrying, if you lose your job or switch employers, you could have to pay the loan back in full immediately. If you default on the loan, it will be treated as a withdrawal, and you’ll be subject to taxes and the 10% penalty if you’re under the age limit.
The math comes down to how much money you save by not paying interest on your loan versus how much you lose by not letting your saved money compound. This is what economists call “opportunity cost.” The opportunity to make more money in the long run by letting your nest egg grow is balanced against the money saved on interest payments.
“It’s much better to let the money in your IRA grow for the long term than to pull it out early for your loans,” says Farrington. That’s because over the last 10 years, the inflation-adjusted returns for the S&P 500 are 11.18%, and the interest rate on a federally subsidized undergraduate student loan disbursed in July 2015 was 4.29%.
The difference between the cost of your student loan, which will have the same interest rate for the life of the loan, and your investment returns in a 401(k) may be very large by the time you’re ready to retire.
Instead of pulling from your retirement savings to pay off student loans, consider these alternative debt repayment strategies:
If you haven’t already signed up for an income-driven repayment plan, you may have missed the boat on 20- or 25-year forgiveness. After the passage of the One Big Beautiful Bill in 2025, Congress replaced the older, more generous PAYE, REPAYE and SAVE forgiveness plans with the Repayment Assistance Plan (RAP) that forgives your student loan after 30 years (360 qualifying monthly payments).
That said, the RAP program does waive unpaid accrued interest to prevent balance growth and forgives any remaining debt after 30 years. RAP also lowers your payment by $50 per dependent.
If you work in a qualified public sector job, you may still qualify for the Public Service Loan Forgiveness Program, which offers student loan forgiveness after ten years (120 qualifying monthly payments).
Many states also offer debt repayment assistance to qualifying professionals. You often have to work in a shortage or high-need area for a few years to qualify. These programs are most commonly available for legal, teaching, healthcare, dental and veterinary professions.
Refinancing your student loans has the potential to lower your interest rate and restructure your debt to become more affordable.
Keep in mind that refinancing can only occur with a private lender. If you refinance federal loans, they become private debt, and you’ll lose access to federal repayment plans, forgiveness programs, and other protections.
