Search
  • Evan Werckenthien

Student Loan Repayment with a 529 College Savings Account

Updated: Aug 4

Within a two-year timespan, there have been two large changes to what are considered “qualified distributions” in 529 college savings accounts. The first came from The Tax Cuts and Job Act of 2017, allowing K – 12 private school expenses to be considered qualified expenses. Most recently, the SECURE Act allows student loan repayments to also be considered qualified expenses. This second change has a much larger effect on young professionals currently paying off student loans, parents with over funded accounts, and grandparents who wish to help pay for grandchildren’s education expenses.


529 college savings account owners may now make distributions for student loan repayments. Unlike before, those withdrawals are now considered tax and penalty free. However, there is a lifetime distribution limit of $10,000 per 529 beneficiary (not account owner). It doesn’t matter if the distributions are a one time lump sum or monthly. The portion of student loan interest that is paid for with 529 plan earnings is not eligible for the student loan interest deduction. That minor drawback is not significant enough for many Americans that could benefit from this change.


By expanding the definition of “qualified distributions” to include student loan payments, three new strategies can be used:


Helping to eliminate overfunding: An account owner can now pay off their children’s student loans if they have a balance in their 529 account after graduation. This will go a long way in making sure children receive an equal or fair share of their 529 plan, something that parents can struggle with.


Potentially receiving tax benefits: By paying off student loans through a 529 college savings account, individuals can potentially take advantage of state tax advantages offered by a 529 plan. For example, in the state of Indiana, individuals can receive a 20% tax credit on 529 plan contributions. That tax credit is maxed out at $1,000 per year. If an individual were to make $5,000 contributions to a 529 plan for two years, they could potentially receive $2,000 in tax credit. That would go a long way in helping to pay off student loans, as the average student loan balance in 2019 was over $35,000.


Grandparent distribution: Grandparents can now help pay for college without affecting financial aid eligibility. A grandparent-owned 529 plan distribution can offset financial aid packages up to 50% of the distributed amount. This can be avoided if that distribution is made after the student graduates and goes towards their student loans.

Before beginning one of these strategies, it is imperative for account holders to check with their own state’s 529 plan rules. Although passed through the SECURE Act, each state will also need to recognize student loan repayment as a “qualified distribution”. This process of states recognizing and confirming student loan distributions as qualified distributions could still take weeks or months. Account holders in states that do not go along with the new federal rules may be subject to state income taxes and penalties, or possibly a repayment of state tax breaks.


Please contact me for more information, strategies, or specifically how this change may affect you.

Evan Werckenthien, CFP©


Evan@EWwealth.com

Work: 317-587-0858

Cell: 317-627-2529


Disclosure:

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. E.W. Wealth Management and Cambridge are not affiliated. The information in this email is confidential and is intended solely for the addressee. If you are not the intended addressee and have received this email in error, please reply to the sender to inform them of this fact. We cannot accept trade orders through email. Important letters, email, or fax messages should be confirmed by calling 317-587-0858. This email service may not be monitored every day, or after normal business hours. Cambridge does not provide tax advice.

Source: Experian, Federal Reserve

2 views

Check the background of your financial professional on FINRA's BrokerCheck.

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA / SIPC . Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. E.W. Wealth Management and Cambridge are not affiliated.

Check the background of E.W. Wealth Management,  Evan Werckenthien on FINRA's BrokerCheck

Licensed in AZ, CT, FL, IL, IN, KY, NC, OH

This website is not part of Facebook or Facebook Inc. Additionally, this site is NOT endorsed by Facebook in any way. FACEBOOK is a trademark of FACEBOOK Inc.

Privacy Policy & Terms and Conditions 

Cambridge Does not offer legal or tax advice.  PLEASE NOTE: The information being provided is strictly as a courtesy. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to. We make no representation as to the completeness or accuracy of information provided at these websites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this website.