Can You Use Your 529 Plan to Pay Down Student Debt?
Spring has arrived along with longer days and warmer weather! Along with the majestic panorama of blooming trees and flowers, Springtime is also the time of year when many families are scrambling to figure out how to pay for college. According to Finaid.org, a financial aid website established in 1994, tuition rates in the U.S. continue to soar at about 8% each year. This means that the cost of college doubles every nine years.
As a result, millions of borrowers rely on student loans to finance their education. This may explain why U.S. student debt has skyrocketed by more than 100% since 2010. The Federal Reserve estimated that student debt in the U.S. surpassed the $1.7 trillion mark in the third quarter of 2020.
Naturally, there is a growing concern about how to tackle the college debt crisis.
We recently received a question from a client inquiring if they are allowed to use money from their youngest child’s 529 plan to help paydown their oldest child’s student loan debt.
The good news is yes.
In fact, Section 302 of the SECURE Act of 2019 now permits 529 plan holders to use some of their 529 plan to pay down qualified student loans. Like any piece of legislation, it is important to pay close attention to the details in order to avoid future tax implications.
Here is a summary on the major components of Section 302. You can now withdraw up to $10,000 for the following reasons:
- To pay down qualified student loans penalty-free – with conditions. The first is that the $10,000 maximum is a lifetime limit for a beneficiary and each sibling. This means a family with two children can take out a maximum of $20,000 to pay down their student loans. Secondly, plan holders cannot claim any student loan interest deductions paid with this money.
- To cover expenses related to any registered apprenticeship program attended by the beneficiary. This includes any additional costs such as fees, equipment, books, and other supplies.
We hope this helps you take full advantage of your efforts to prepare for the cost of your child’s education. Next week, we’ll share a couple of other ideas of how you and your child can help contain the cost of college.
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