If you have children or grandchildren, you may already have invested in, or at least considered, a 529 plan, one of the most popular college-savings vehicles. But you might be interested to know that a 529 plan can now be used not only to save for college, but also to pay off college loans.
As you know, when you invest in a 529 savings plan, your money is professionally managed and you have a variety of investment options from which to choose. Your earnings grow tax-deferred and withdrawals are free from federal taxes, provided the money is used for qualified higher education expenses. In some states, withdrawals are also exempt from state taxes. (529 plan withdrawals not used for qualified expenses may be subject to federal and state income taxes and a 10% IRS penalty on the earnings.)
Until now, you could only use a 529 plan to help pay for college or trade school. (You can also use it for K-12 expenses, but not all states offer tax breaks for K-12 savers.) However, under recently passed legislation, you can now potentially use up to $10,000 from a 529 account to repay federal and most private student loans taken out by your beneficiary. This $10,000 is a lifetime limit, applicable to each beneficiary, so if you have 529 plans for three children/grandchildren, you’ve got $30,000 to pay for school or pay back student loans. (The new law also allows 529 funds to be used to pay for certain apprenticeships, which typically combine on-the-job training with classroom instruction, often at a community college.)
Of course, you may end up using all your 529 funds just to pay those college bills, which can be quite high. But if you have several children, each with a 529 plan, and one of them attends a less expensive school and doesn’t need the full amount in their plan, you could use the money to help pay off some of the other siblings’ student debts. Or if a student graduates early from college or receives more scholarships than expected, you could end up with some leftover 529 plan funds, which could then be used to repay student loans.
If you are thinking you’ll use 529 plan funds to help pay back student loans, you’ll need to keep a couple of things in mind. First, you can’t “double dip” with federal education tax benefits – if you pay student loan interest with tax-free 529 plan earnings, you can’t also take the student loan interest deduction. And second, some states limit use of 529 plans to tuition, fees, textbooks and supplies. In other words, these states may not recognize student loan payments (or apprenticeship costs) as eligible expenses – which means if you’re in one of these states, your 529 plan dollars that go to student loan repayments or apprenticeship costs could be subject to state income taxes and penalties, or possibly repayment of state tax breaks. In any case, you’ll need to consult with your tax advisor before using 529 plan funds for loans or apprenticeships.
A 529 plan has always been a good way to help get your children or grandchildren to college – and now it can help them pay off some debts when they leave.
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PSA: 529 Plans: Save now, pay off debts later
TBA: Feb. 17, 2020
If you have children or grandchildren, you might be thinking about investing in a tax-advantaged 529 college savings plan. But now, you may have even more reason to consider one.
Thanks to recent legislation, you can now potentially use up to $10,000 from a 529 account to repay federal and most private student loans taken out by the beneficiary you’ve named – your child or grandchild.
Of course, you may end up using all your 529 funds just to pay those college bills, which can be quite high. But if you have several children, each with a 529 plan, and one of them attends a less expensive school and doesn’t need the full amount in their plan, you could use the money to help pay off some of the other siblings’ student debts.
Consult with your tax advisor before using a 529 plan to pay off student loans, though, as some states may disallow tax benefits if the money is used in this way.
Nonetheless, a 529 plan has always been a good college-funding tool – and now it’s gotten even better.
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