04 Mar Can I use a 529 plan to pay off my student loans?

Q. Can I use a 529 plan to pay off my student loans?
— In debt

A. Thanks to the SECURE Act — short for the Setting Every Community Up for Retirement Enhancement Act — you can use a 529 plan to pay off student loans.

But of course there are limits.

The act expanded the definition of “qualified education expenses” for 529 plans to include student loan repayments, said Gene McGovern, a certified financial planner with McGovern Financial Advisors in Westfield.

The change is retroactive to Jan. 1, 2019.

McGovern said tax-free distributions from 529 plans can now be used to pay both principal and interest on student loans, but there’s a $10,000 lifetime limit per person. This limit is not adjusted for inflation, he said.

“To put that $10,000 number into perspective, outstanding student loan debt in the U.S. currently totals more than $1.6 trillion,” he said. “That debt is shared by about 45 million Americans, which averages out to about $36,000 each.”

The ability to shave $10,000 off that average $36,000 loan with tax-free 529 plan funds, a 28 percent reduction, is therefore significant, McGovern said.

The news gets even better than that: Outstanding student loan debt for each of a 529 plan beneficiary’s siblings can also be paid with up to $10,000 of plan funds, he said.

He offered this example. If a family has three children with student loan debt, and there are funds left in one or more of their 529 plans beyond what’s needed for college expenses, up to $30,000 could be used, but not more than $10,000 per child, for “qualified education loan repayments.”

As with most education benefits in the tax law, the change comes with restrictions that are designed to prevent taxpayer abuse, he said. Any interest paid on student loans with 529 plan funds cannot also be taken as a student loan interest deduction on Form 1040.

New Jersey generally conforms with the federal tax treatment of 529 plans, so the ability to repay qualified student loans with tax-free distributions should also be available in New Jersey, McGovern said. Some states don’t automatically follow federal law on 529 plans, so check with your state if you live elsewhere.

“Finally, note that the SECURE Act also expanded the definition of qualified education expenses to include those for apprenticeship programs that are registered and certified with the Department of Labor,” he said.

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This story was originally published on March 4, 2020.

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