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Can You Borrow from Your 403(b) to Pay Off Debt?
by
JG Wentworth
•
August 14, 2025
•
7 min
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
If you’re struggling with high-interest debt and have a substantial balance in your 403(b) retirement plan, you might be wondering whether you can tap into those funds to eliminate your financial burden. The short answer is: it depends on your specific plan, but many 403(b) plans do allow loans. However, borrowing from your retirement savings is a decision that requires careful consideration of the rules, benefits, risks, and long-term implications for your financial future.
First things first: What is a 403(b) Plan?
A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement savings plan available to employees of public schools, certain tax-exempt organizations, and some ministers. Like a 401(k), it allows you to contribute pre-tax dollars from your paycheck, reducing your current taxable income while building retirement savings that grow tax-deferred.
The key difference between 403(b) plans and other retirement accounts is that they’re specifically designed for employees of nonprofit organizations, public schools, and certain religious organizations. These plans often have unique features and may be administered differently than traditional 401(k) plans.
Can you borrow from your 403(b)?
The ability to borrow from your 403(b) depends entirely on whether your specific plan allows loans. Unlike some retirement account features that are mandated by law, 403(b) loans are optional plan features that employers can choose to include or exclude.
Plans that typically allow loans:
- Many larger school districts and universities
- Well-established nonprofit organizations with comprehensive benefits
- Plans administered by major financial institutions
Plans that may not allow loans:
- Smaller organizations with basic 403(b) offerings
- Plans that only offer annuity contracts
- Simplified or bare-bones retirement programs
To find out if your plan allows loans, check your plan documents, contact your HR department, or speak directly with your plan administrator. This information should also be available through your online account portal if your plan offers one.
403(b) loan rules and regulations
If your plan does allow loans, federal law governs the basic rules, but your specific plan may have additional restrictions or requirements.
Maximum loan amounts
You can borrow the lesser of:
- 50% of your vested account balance, or
- $50,000
However, there’s a special provision: if your vested balance is less than $20,000, you can borrow up to $10,000 even if that exceeds 50% of your balance.
Repayment terms
- Standard loans: Must be repaid within 5 years through payroll deductions.
- Home purchase loans: May extend up to 15 years if the loan is for buying your primary residence.
Interest rates are typically set at the prime rate plus 1-2%, though your plan may have different terms. Importantly, you’re paying interest to yourself, as it goes back into your 403(b) account.
Vesting requirements
You can only borrow against your vested balance. While your own contributions are always 100% vested, employer contributions may have a vesting schedule. Check your plan documents to understand your vesting status.
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The loan process: How it works
Step 1: Application
Complete a loan application through your plan administrator. You’ll typically need to specify:
- Loan amount requested
- Intended use of funds
- Preferred repayment term
Step 2: Documentation
Some plans require documentation of your intended use, especially for home purchases or financial hardships.
Step 3: Processing
Most loans are processed within 1-2 weeks, though this varies by administrator.
Step 4: Receiving Funds
Funds are usually distributed via check or direct deposit to your bank account.
Step 5: Repayment Setup
Automatic payroll deductions begin, typically with your next paycheck after the loan is processed.
Using 403(b) loans for debt consolidation
Under certain circumstances, you may consider this strategy to streamline what you owe:
- High-interest debt: If you’re paying 18-25% on credit cards and can get a 403(b) loan at 6-8%, the interest savings can be substantial.
- Simplified payments: Consolidating multiple debts into one payroll deduction can simplify your finances and reduce the risk of missed payments.
- Tax considerations: Unlike personal loans, 403(b) loan interest isn’t tax-deductible, but you’re paying it to yourself rather than a bank.
Advantages of 403(b) loans
Financial benefits:
- Lower interest rates compared to credit cards and personal loans
- Interest paid to yourself rather than to a lender
- No credit check required since you’re borrowing your own money
- Quick processing compared to traditional loans
- Flexible use of funds for any purpose
Practical advantages:
- Automatic repayment through payroll deduction reduces default risk
- No impact on credit score (unless you default after leaving your job)
- Immediate debt relief can reduce financial stress
Disadvantages and Risks
Impact on retirement savings:
- Lost investment growth: The borrowed amount is no longer invested in the market, potentially missing out on years of compound growth.
- Reduced retirement security: Every dollar borrowed is a dollar not working toward your retirement goals.
Employment risks:
- Immediate repayment requirement: If you leave your job, the entire loan balance typically becomes due within 60-90 days. If you can’t repay, it’s treated as a taxable distribution plus a 10% early withdrawal penalty if you’re under 59½.
Double taxation issue:
- You’ll pay taxes again on the same funds: when you withdraw the money in retirement.
Making the decision
Before you leverage your 403(b) to pay off debt, consider the following:
Financial analysis
- Interest rate comparison: Calculate total interest costs for your current debt versus a 403(b) loan.
- Opportunity cost: Consider what your 403(b) balance might earn if left invested.
- Timeline: How long will it take to pay off debt each way?
- Cash flow: Will the lower payment improve your monthly budget significantly?
Personal circumstances
- Job security: How stable is your employment?
- Emergency fund: Do you have adequate emergency savings?
- Age and retirement timeline: How many years until retirement?
- Debt discipline: Are you likely to accumulate new debt after paying off the old?
Risk tolerance:
- Market risk: Are you comfortable missing potential investment gains?
- Employment risk: Can you handle immediate repayment if you lose your job?
- Retirement risk: Will this significantly impact your retirement security?
Special considerations for different situations
- Teachers and educators: Many teachers have access to both 403(b) and 457(b) plans. If available, 457(b) loans might offer more favorable terms, including no early withdrawal penalty if you leave your job.
- Nonprofit employees: Some nonprofit organizations offer employee assistance programs that might provide alternative debt relief options or financial counseling.
- Multiple 403(b) accounts: If you have 403(b) accounts with multiple providers (common in education), you may need to choose which account to borrow from based on loan terms and investment performance.
The bottom line
Borrowing from your 403(b) to pay off debt can be a viable strategy in certain circumstances, particularly when you’re facing high-interest debt and have stable employment. However, this strategy comes with significant risks, including the potential for immediate repayment if you lose your job, the opportunity cost of missing investment growth, and the long-term impact on your retirement security. The double taxation issue, while real, may be less important than the immediate benefits if you’re drowning in high-interest debt.
The decision ultimately depends on your specific financial situation, job security, debt load, and risk tolerance. Before proceeding, carefully analyze the numbers, consider alternatives, and ensure you have a solid plan to avoid accumulating new debt.
There’s always JG Wentworth…
Struggling with unsecured debt? We might be able to help. If you owe $10,000 or more there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 24-60 months
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
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* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.