Using IRA funds to pay off an old college loan
Can IRA funds be used, without a 10% penalty, to pay off an old school loan? Example: Individual graduated with a Bachelor’s degree in 1995, but still have a $10,000 loan. Can they now take money from their IRA and get the waiver of the 10% penalty because the money was used for higher education?
Permalink Submitted by Alan Spross on Fri, 2007-08-31 22:56
No. not in the case you posted. The penalty waiver only applies when IRA distributions are taken to pay for qualified higher education costs incurred in the same year. However, if you took out a loan that covered expenses incurred in that same year, and then took IRA distributions to make loan payments in that year, the amount of the distribution applied to the loan principal that year would escape the penalty. There are also other offsets you must consider such as most types of education aid.
Note that student loan interest may qualify for a deduction under income adjustments.