Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “Can 529 plans be used for student loans?” Thanks to the SECURE Act of 2019, 529 college savings plan can now be used to pay for a limited amount of student loan debt – a lifetime limit of $10,000. Previously, 529 plans couldn’t be used for student loans. This gives some added flexibility for students and families, even if they have no intention of using loans.
First, it’s important to know that the $10,000 lifetime limit is for the beneficiary of the 529 plan. An additional $10,000 can also be used to pay down student loans for each sibling of the beneficiary. This means a family with three children that each have $10,000 of student loan debt would be able to use up to $30,000, even if only one of the children had funds left in a 529 plan.
This change also gave grandparents some flexibility. Before, if a grandparent owned a 529 plan for the benefit of a grandchild, income from the 529 plan may need to be reported on the FAFSA, which is a Federal tool used in calculating student financial aid. Now, grandparents may decide to wait until a child has graduated from college before gifting them 529 dollars, which can then be used to pay off a student loan.
Another strategy families may be able to consider now is avoiding withdrawals from a 529 plan if the investments inside of it have declined. For example, let’s say a family saved enough into their 529 plan to pay for all college expenses for a child. However, they took a little too much risk and the markets fell just as they started incurring college costs. They might decide to use a student loan temporarily to give their 529 plan time to recover. Assuming the loan would be $10,000 or less, they could then use the 529 plan to pay if off.
The ability to draw $10,000 for student loans may not seem like a lot when the overall costs may be significantly more, but this law change does give American families more flexibility. We were happy to see Congress make this change. If you have a question about this topic or have a question for next month’s video, please send it to TFreeman@MonetaGroup.com. Thanks for watching and we’ll see you next month.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.
