- Did you know that you can use your 529
college savings plan to pay all or part
of your student loans?
But not all student loans qualify.
Here's what you need to know.
(smooth music)
Hey guys, it's Justine with the College Investor,
Investing and Personal Finance for Millennials.
So this law actually went into effect in 2019
in which you can take the earnings
and distributions from your 529 college savings plan
and use it to pay off all or part of your student loans.
But there are some limits that you should know.
There are limits on this 529 plan
and how much you can actually put
towards your student loans.
Qualified distributions are limited to $10,000 per borrower.
Now, this is a lifetime limit, not an annual limit.
In other words, you can't take $10,000
from your 529 plan every single year.
Once you take it, it's done and that's all you get.
Also, you can't take from multiple 529 plans
in order to do this.
It's just 10k per borrower.
529 plans can also repay parent loans.
So you can actually change the beneficiary
on the 529 plan to a parent
and if they have any student loans in their name,
regardless if it was actually for them or for a child,
they can take $10,000 out of that 529 plan
and pay off part of their loans.
You can do this for each set of parent, if you want.
So you could have it set up
so that dad is the beneficiary,
he gets his 10 grand, and then he's done
and then you can change it to mom
and then she can take her 10 grand
and use that to pay off part of her
or all of her student loans.
I actually think this is one of the best features
about this new law that went into place
that you can do this for parents and for yourself
and so everybody takes a little piece
of the pie in order to do this.
So I think that's a great way
to maybe hack the system a little bit,
even though it's not really hacking.
It's written in law, so you can absolutely do that.
Okay, not all student loans qualify.
Now, you can apply this to federal and some private loans,
but not all private loans qualify
so you'll wanna check that out.
In addition to that, the loan needs to satisfy
several requirements, including that the loan
must have been borrowed solely to pay
for qualified higher education expenses.
Loans from retirement plans do not qualify.
Also, loans made by someone else
who is related to the borrower
such as a brother, a sister, a spouse are not eligible.
Also the loan must have been borrowed
within 90 days of the date the college costs were paid.
I think that's pretty straightforward.
The student must have been enrolled
on at least a half-time basis during the academic term.
The student must have been enrolled
in a degree or certificate program.
It's also important to note
that continuing education loans do not qualify here.
Next, the student must have been enrolled
in a college or university that is eligible
for Title IV federal student aid
and qualified higher education expenses
are based on the definition of cost of attendance
in the Higher Education Act of 1965.
So basically, if you used any of your student loans
to pay for a personal computer, that wouldn't qualify.
So just make sure that the loan was actually used
for legit qualified education expenses.
Another thing that you'll wanna make sure
you are aware of is that some states don't conform
to federal rules when it comes to using 529 plans
to pay off student loan debt.
So even though this is recognized
by the IRS on the federal side,
some states may say, nope, we don't recognize that,
and you might be subject
to certain state taxes as part of those distributions.
Now, we have a huge ultimate mega guide on 529 plans
that includes specific key information
for every single state and their 529 plans.
Be sure to check that out at thecollegeinvestor.com
so that you know exactly which states are not conforming
and which ones are so that you can take advantage of this.
Now, let's talk about how this all impacts
student loan interest deductions.
First of all, the IRS never likes double dipping,
so they're not gonna allow you to do it here.
So if you've had experience with filing your own taxes,
then you might know that a student loan interest deduction
can be taken for up to $2,500 on your tax return,
which reduces your taxable income.
When you are using qualified distributions from a 529 plan,
that basically means that you can't take that deduction
on top of taking out that distribution from your 529 plan.
So the amount of interest that you may have been eligible
through that student loan interest deduction
is reduced by the earnings that you have taken
from that 529 plan.
So you might be in a special situation
if you have money in a 529 plan and student loans.
Perhaps you took out student loans
and then a 529 plan was created and you let that grow.
Comment below if this is your situation,
because I think things like this
can really help out borrowers
and so that you can kind of,
I said hack, but yeah, hack the system again
to make sure that you are taking every opportunity
to use money available to you outside your normal income
to pay off those student loans even faster.
Remember to check out that mega guide on 529 plans
at thecollegeinvestor.com
and we'll catch you in the next one.
(smooth music)