Greetings, Evenstar, and welcome. You asked:

<<We are currently paying off a school loan that has just under $20,000 principal left on it. We are considering withdrawing funds from a Traditional IRA to pay it off. We understand that if we do that we will have to pay income tax on the distribution, but not the 10% penalty.

Here's the question: If we withdraw enough to cover that income tax payment as well, is that amount subject to the penalty?>>

Yes, you would have to pay both income taxes and the early withdrawal penalty should you decide to do this. To qualify for the early withdrawal exception for educational expenses, those expenses must be incurred in the year of the withdrawal for all intents and purposes. The outstanding balance on student loans for for expenses incurred in prior years does not meet the test for the exception. And I'll agree with the others who have indeicated using a traditional IRA to repay your loan is almost certainly a very poor idea under those circumstances.

Regards..Pixy