Can you use a 529 to pay student loans?


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If you have a 529 plan and recently graduated, you can use funds from your 529 to pay student loans. (Shutterstock)

Student loan debt affects a large portion of college students – 55% of 18-29 year olds who graduate with a bachelor’s degree have some form of student loan debt, with the average amount ranging from $20,000 to $24,999 in 2020, according to Federal Reserve Data.

If you’re struggling to pay off your student loan after graduation, here’s some good news: the IRS now allows 529 plan holders to use those funds to pay student loans. Keep reading to learn how to pay off student loan debt with a 529 plan and some ways to use leftover 529 money.

Refinancing can also be a way to make it easier to pay off student loans. Visit Credible for learn more about refinancing student loans and view your prequalified rates.

What is a 529 package?

A 529 plan, also called a qualified tuition plan, is a type of tax-free savings account designed to help pay for eligible educational expenses. States, state agencies, and educational institutions can sponsor these plans, which come with tax benefits. The idea is that the account holder can help grow the savings that their beneficiary will use for their future education, whether for themselves, a child, grandchild or spouse.

Two types of 529 plans are available:

  • Prepaid Tuition Plans — These plans offer plan holders the option to purchase units or credits from participating educational institutions for future tuition and mandatory fees. These plans allow you to save money on tuition costs by paying today’s prices before they increase when the recipient is ready to go to college. You generally cannot use this type of plan to pay for future room and board at a college or university, or to prepay elementary or high school tuition.
  • Education savings plans — Account holders can open an investment account specifically to save for a beneficiary’s future eligible educational expenses. You can use the money invested for all eligible study expenses – tuition, fees, room and board.

One of the main benefits of a 529 plan is that withdrawals are generally exempt from federal income tax, and often state taxes, as long as you use the money for eligible educational expenses.

What is the SECURE law?

The Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, signed into law in 2019, changes how 529 plan holders can use funds for new eligible expenses, including student loan repayments (more details below). ).

Account holders can also use 529 funds to pay for expenses related to eligible learning programs the recipient is participating in, such as equipment, books, fees, and other learning-related supplies.

The SECURE law allows account holders to withdraw money for these purposes retroactive to January 1, 2019.

With Credible, you can compare student loan refinance rates from various lenders, and it will not affect your credit.

Can you use a 529 plan for student loans?

Yes, you can use a 529 plan to pay qualified student loans.

The SECURE Act allows account holders to use a lifetime limit of $10,000 per beneficiary to repay student loans tax-free from their 529 plan – both federal student loans and most private.

So if you have multiple children, you can use up to $10,000 each for a child and sibling for their student loans — up to $20,000 in total.

Prior to the SECURE Act, withdrawals for student loan repayments did not count as eligible educational expenses. This means that if you used your 529 plan for this purpose, you were subject to a 10% federal tax penalty. In addition, any distribution of profits was considered taxable income, which could have increased your tax liability.

How to Use a 529 Plan for Student Loans

If you want to use your 529 plan to pay student loans, follow these steps:

  • Decide how much you want to pay. You can use up to $10,000 per beneficiary. To determine how much you want to withdraw, consider the current balance of student loans you want to repay.
  • Check to see if your state considers student loans an eligible expense. Just because the federal government has expanded the definition of eligible education expenses to include student loans doesn’t mean your state has. Before making a withdrawal, contact your state to see if its definition of eligible educational expenses meets federal definitions. If your 529 plan is from a different state than where you live, it’s also worth contacting the state that holds your plan to see what their laws are and how that might affect your withdrawal.
  • Make the withdrawal and apply it to student loans. Once you’ve determined that you can use 529 withdrawals to pay off a student loan, follow the plan holder’s instructions for making a withdrawal. Then pay the distribution for student loans – you will need to do this in the same calendar year you made the withdrawal. Be sure to keep proof that you made withdrawals and make sure it matches student loan repayments.

Uses for Leftover 529 Silver

Sometimes families may have leftover money in their 529 plan. If this is the case, you can use the leftover money for another child’s tuition.

Many plans allow you to change the beneficiary’s name, so if you have another relative, you might want to consider putting the 529 plan in their name. There is nothing wrong with leaving the funds untouched until you know what you intend to do with the money, or even waiting for a bull market to end before using the remaining funds.

Consider refinancing to save money on your student loans

Student Loan Refinance is another way to save money on student loans, especially if you can get a lower interest rate. If you extend your repayment term, you’ll likely end up with a smaller monthly payment (but you’ll also end up paying more interest over the life of the loan).

If you have federal student loans, think carefully before refinancing. Refinance them as a private loan means you will lose access to federal benefits and protections, such as income-based repayment plans and student loan forgiveness programs.

That being said, the savings from refinancing your loans could be worth it in some cases. It’s a good idea to shop around and compare multiple lenders to find the best student loan refinance for your situation.

If you’re ready to refinance, Credible makes it easy for you compare student loan refinance rates from various lenders in minutes.


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