![]() Miscommunications between parents and grandparents Then, after the economic recovery, one can use the 529 plan money to repay the student loans. After a correction or bull market, the best strategy might be to borrow to pay the bursar’s bill so you can leave the 529 plan funds invested. ![]() Sometimes the stock market does not cooperate with the timing of college bills. Likewise, veterans’ educational assistance or employer-paid educational assistance can qualify for a tax penalty waiver. If the student wins a qualified scholarship, the 10% tax penalty is waived on a non-qualified distribution up to the amount of the scholarship. Lifetime Learning Tax Credit (LLTC)Ī similar situation applies to the LLTC, but involves up to $10,000 in qualified expenses. Using the 529 plan to repay student loans avoids both the tax penalty and the income tax on the distribution. Although one can avoid the 10% tax penalty on a non-qualified distribution, up to the amount used to claim the AOTC, one must still pay income tax on the earnings portion of the distribution. So, families should carve out up to $4,000 in qualified expenses to be paid with cash or student loans instead of a 529 plan distribution to qualify for the maximum AOTC. The AOTC is worth more, per dollar of qualified expenses, than a tax-free distribution from a 529 plan. military academy, the leftover 529 plan funds can be used to repay the student loans of an older sibling who has already graduated. If a younger child doesn’t go to college, enrolls at a less-expensive college, such as a community college or in-state public 4-year college, or enrolls at a U.S. There are several situations in which a family might have both student loans and leftover 529 plan money. The SECURE Act provides families with greater flexibility in spending 529 plan money. Why use a 529 Plan to Repay Student Loans?Īfter all, the best use of 529 plan money is to spend it up front, to avoid the need to borrow student loans at all.īut, despite all of the planning, sometimes families have leftover 529 plan funds as well as student loans, and want to use the leftover money to repay the student loan debt. A 529 plan account owner may change the 529 plan beneficiary at any time without tax consequences. Siblings may include a brother, sister, stepbrother or stepsister. The law includes an aggregate lifetime limit of $10,000 in qualified student loan repayments per 529 plan beneficiary and $10,000 per each of the beneficiary’s siblings. Note that the portion of student loan interest that is paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction. Under the SECURE Act, principal and interest payments toward a qualified education loan are considered qualified education expenses. You can take a tax-free 529 plan distribution to repay up to $10,000 in student loans owed by each of the beneficiary and the beneficiary’s siblings. The SECURE Act, which became law on December 20, 2019, expanded the benefits of 529 plans by adding student loan repayments and the cost of apprenticeship programs as qualified expenses.
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