02 Apr Can I use a 529 plan to pay off student loans?

Q. Under the new SECURE Act, 529 plan funds can be used for $10,000 of student loan repayment. Does New Jersey follow the same rule?
— Debt-ridden

A. We’ve got good news for you.

Yes, New Jersey follows the federal rule in allowing 529 plan funds to be used for student loan repayments, up to $10,000, tax-free and penalty-free.

The rule applies to the beneficiary of the 529 plan, and also to any of the beneficiary’s siblings, said Gene McGovern, a certified financial planner with McGovern Financial Advisors in Westfield.

For this purpose, “siblings” include a brother, sister, stepbrother or stepsister, McGovern said.

According to the New Jersey Division of Taxation’s website, “any amounts that are used for higher education expenses as defined under section 529 of the Internal Revenue Code are excluded from income.”

IRC Section 529, in turn, as amended by the SECURE Act, states that qualified higher education expenses include “principal or interest on any qualified education loan…of the designated beneficiary or a sibling of the designated beneficiary,” up to $10,000 per individual, McGovern said.

“In a nutshell, tax-free distributions from 529 plans can now be used to pay both principal and interest on student loans in New Jersey, subject to the $10,000 cap for each plan beneficiary and for each of their siblings,” he said.

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This story was originally published on April 2, 2020.

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