Many recent graduates who are just starting out in the workforce struggle to find the money to pay down their student loans, let alone to pay for school. In addition to allowing individuals to save money tax-free for education and other needs, 529 plans enable them to make partial loan payments without incurring penalties for themselves or their beneficiaries.
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The SECURE Act’s modifications broaden the group of people who qualify for the tax advantages of a 529 plan, according to Jason Delisle, resident fellow at the American Enterprise Institute, a think tank located in the District of Columbia.
“If you or a dependent had to take out a student loan because you didn’t have the money to save for a 529 and you later found out that you did, then you are now eligible to receive the 529 benefit,” says Delisle. However, when considering these matters from the perspective of the federal government, their benefit is not as great as what some states provide. “.
He says there are a few situations in which people have both remaining 529 funds and student loans, though they may be uncommon. People might, for instance, try to avoid selling their 529 investments during a down market or take out unnecessary student loans in order to benefit from the ability to use their 529 funds to repay the debt.
According to Kantrowitz, there are situations in which it might even make sense for people who graduated from college a long time ago to open a 529 plan in order to save money for student loan repayment. For instance, if a student is enrolled in graduate school, this might be wise strategically.
In an email, Kantrowitz stated, “Deferring the loans while one can afford to make payments now might not make sense, since the loans probably continue to accrue interest.” However, it’s possible that they are enrolled in graduate school or that their grandparents wish to assist them in paying back their student loans. Most likely, they have a younger sibling who, for whatever reason (perhaps because the sibling received a full scholarship or is enrolled in a U.S. S. military academy), and the parents wish to use the remaining funds to assist the graduate student in repaying their student loans. “.
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In the end, most families might not be significantly impacted by the changes to 529 plans, according to Brent Weiss, chief evangelist and certified financial planner at Facet Wealth, a financial planning company.
Although it has little effect, many American families benefit from the flexibility it provides. “College savings can seem like a difficult undertaking, and it can be difficult to determine how much money to set aside and how to do it without expert guidance,” Weiss emailed. “More flexibility in how families can use their funds will reduce the stress associated with setting aside money for a specific goal when it can be difficult to estimate final costs.” “.
The SECURE Act has given parents who have invested in tax-advantaged 529 plans a new option in the event that their child decides not to attend college. Formerly, the main course of action for parents in this scenario would have been to transfer the 529 plan to a family member—a sibling, first cousin, aunt, or even to themselves—so they could use it for approved educational costs. The law now permits people to pay for apprenticeships with their 529 distributions, providing students with an additional way to utilize their savings accounts without incurring penalties.
Experts advise families and borrowers who wish to benefit from the new law to confirm their specific plan before making any withdrawals.
“How the states will respond is a big unknown,” wrote Kantrowitz. Which of the 30 states that offer tax credits or deductions for state income taxes will permit their use in conjunction with student loan repayment is still unknown. If the Tax Cuts and Jobs Act of 2017’s addition of K–12 tuition is any indication, then most likely 21 states will permit it. The others will consider repayment of student loans with funds from 529 plans to be an unqualified distribution. “.
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FAQ
Can I use 529 funds to pay off student loans?
The flexibility of 529 accounts was enhanced by the SECURE Act of 2019, particularly with regard to the use of funds for post-graduation college expenses. The act permits student loan repayment up to a $10,000 lifetime cap for the beneficiary of a 529 account.
What a 529 Cannot be used for?
Nevertheless, 529 plans are limited to use for approved educational costs. Should you utilize the funds for ineligible costs, like vacation during spring break or a laptop for gaming, you may be subject to income taxes and penalties on the withdrawals.
Can I take money out of my 529 not for education?
If the assets in a 529 account are not used for eligible educational expenses, you will be required to pay both federal income taxes and a 2010 percentage penalty on the earnings.
Can you use a 529 for something other than college?
1. Use the money for other types of advanced education. Although many people only consider 529 plans as a means of funding college, they are actually much more flexible than that. Your child may use the money to cover appropriate costs in an apprenticeship program that is officially recognized by the U S. Department of Labor.
Read More :
https://www.usnews.com/education/best-colleges/paying-for-college/articles/what-to-know-about-paying-student-loans-with-529-plan-funds
https://www.investopedia.com/articles/personal-finance/020217/can-i-pay-student-loans-my-529-plan.asp