Student loan debt has become one of the largest classes of consumer debt in the country. In fact, it affects as many as 43 million Americans.
Finding the money to pay down student loans—let alone pay for school—is a struggle for many new grads who are just starting out in the workforce. Loan forgiveness programs can offer some relief, but only for borrowers who work in selected fields. But there’s a plan in place that not only helps people save for tuition and other expenses tax-free; it also helps them pay a portion of their student loans—or those of their beneficiaries—without penalties.
529 Education Savings Accounts started as a tax-free vehicle to help pay for qualified higher education expenses, such as tuition, room and board, and computer software and equipment. The rules were later expanded allowing parents to withdraw up to $10,000 a year from 529 plans to pay for K-12 tuition at public, private, and religious schools. The rules were modified again allowing for tax-free withdrawals from a 529 account to pay toward student loans.
There’s a lifetime limit of $10,000 per beneficiary from 529s to pay down student loans. It applies to federal student loans and most private ones. There is a $20,000 maximum lifetime withdrawal from 529 plans to pay student debt no matter how many children you have. For example, if you have two children, you can withdraw $10,000 to pay toward student debt for each child. If you have three children or more, $20,000 is still the maximum lifetime deduction from 529s to go toward student debt. You cannot deduct any student loan interest paid with those withdrawals.
The Process
- Decide how much you want to withdraw up to $10,000 per beneficiary.
- Find out if your state considers student loans as a qualifying expense for a 529 account. Even though the federal government says 529 money can be used toward student loans, not all states have the same provision. Whether the 529 plan is sponsored by the state you live in or another state, find out if the state’s definition of a qualifying education expense includes paying student debt.
- Then make the withdrawal and apply it to the student loan. The loan payment must be made in the same year you withdraw the money. Keep proof of the withdrawals and proof of the loan payment.
529 Leftovers
Sometimes there’s money left in a 529 account after a child finishes college. In that case, you can name someone else in the family as beneficiary of that account—another child, yourself, or your spouse if you intend to go back to school for additional education. As long as the money is spent on qualifying educational expenses, it comes out of the 529 plan tax-free.
You can always withdraw money from 529 education savings accounts for things that are not education-related. If you do, you’ll pay federal and state tax on those withdrawals along with a 10% IRS penalty. But there’s no requirement that you withdraw money left in a 529 plan. You can leave it there as long as you want until you decide what you want to do with it.
Disclaimer
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice, or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at [email protected].
