Can an employee use a hardship distribution from his 401(k) to pay for his child’s student loans?

Last Updated: August 1, 2023

Why trust us?

Quick Answer

No. Although a hardship distribution may be used to pay for future tuition on a limited basis, it may not be used to pay off previously accumulated student loan debt.

Legal Perspective

Legal Disclaimer

By Lyndsey Barnett, Employee Benefits Attorney
Bricker Graydon LLP
Cincinnati, Ohio

No. A hardship distribution is not allowed unless it is made on account of an “immediate and heavy financial need,” says employee benefits attorney Lyndsey Barnett (lbarnett@brickergraydon.com) of the firm Bricker Graydon LLP.

The Treasury regulations provide a safe harbor with seven reasons for distribution that are deemed to be on account of an immediate and heavy financial need.

One of the safe harbor reasons is for payment of tuition, related educational fees, and room and board expenses for up to the next 12 months of post-secondary education for the employee, the employee’s spouse, children, or dependents (as defined in Internal Revenue Code §152 without regard to §152(b)(1), (b)(2) and (d)(1)(B)).

While tuition is included, the regulation clearly indicates it is only for tuition for the next 12 months and would not cover past tuition. Therefore, while an employee may qualify for a hardship distribution to pay tuition for a child, the employee cannot use payment of student loan debt as a reason for a hardship withdrawal.

HR Insight

By Sruthi Ananthachari, PHR GMS® LDCP, HR Director
BM Associates Inc.
San Ramon, California

No, the hardship distribution guidelines of the IRS do not include a child’s student loans as a financial need to withdraw from the fund, says HR Director Sruthi Ananthachari. However, if you still need to withdraw from the fund, please review the following:

If you are under 59 1/2 years old you can withdraw from the fund but pay a penalty of 10% and income tax.
If you are over 59 1/2 you are allowed to withdraw without the 10% penalty but will have to pay income tax.
Consider taking a loan from your 401(k) if your plan permits. Since you will be repaying the loan and interest that will go to your account, it is advisable to consider a loan instead of an early withdrawal.
If you are contributing to a Roth IRA plan, then you can withdraw without penalty as this is an after-tax contribution.

Personally, I’d discourage employees from dipping into retirement savings to repay a child’s student loan.

Key Takeaways

A 401(k) may permit a hardship distribution based on an “immediate and heavy” financial need.
Even when there is an immediate and heavy financial need, a hardship distribution is not permissible unless it is necessary to satisfy that need.
Repayment of student loans is not one of seven reasons enumerated by federal regulation as on account of an immediate and heavy financial need (see 26 C.F.R. 1.401.(k)-1(d)(3)(ii)(B)).
A distribution is deemed to be on account of an immediate and heavy financial need if it is for payment of tuition, and related fees and expenses, for the next 12 months of postsecondary education for an employee, spouse, children or dependents.
A hardship distribution is not available to repay student loans.

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