Can I pay student loans with My 529 Plan?

A new law that states that people can pay off student credits with their 529 plans is currently working on Congress. That is good, because the debt of student Rocinant loans affects an estimated 43 million Americans. According to the Institute for College Access & Success, seven out of ten members of the 2015 class have left public and non-profit colleges with student loans. On average, borrowers owed slightly more than $ 30,000.

Finding the money to pay off those loans is often a struggle for many new students who are just taking a career path. Loan forgiveness programs can offer some relief, but only for borrowers who work in selected areas. (For more Student Loan Forgiveness: how does it work? )

Why don’t you pay off student loans with a 529 subscription?

Why don

In January 2017, members of the House, Lynn Jenkins (R-Kan.) And Ron Kind (D-Wis.) Introduced HR 529, also the “529 and ABLE Account Improvement Act of 2017.” The bill focuses specifically on 529 plans, with which you can save on future education costs on a tax-efficient basis. Withdrawals from 529 plans are 100% free of federal taxes if they are used to cover qualified education costs, such as tuition fees and costs or costs and accommodation.

Federal Reserve data shows that the 108 active 529 plans that were operational in 2015 had a joint Common Government about $ 258. 2 billion in assets. Prepaid tuition plans accounted for $ 24 billion of that amount; the rest was held in university savings plans. The account is primarily intended to encourage employers to contribute funds to 529 plans on behalf of employees through a tax incentive. A maximum of $ 100 in employer contributions for these accounts would be excluded from taxes. Small companies that contribute to 529 plans would also receive a tax reduction to help with the cost of setting up payroll deductions for these accounts.

The legislation would also provide an advantage for savers by canceling fines for using 529 funds to pay off student loans. Currently, taxpayers using 529 money for anything other than qualified education costs are subject to a federal tax penalty of 10%. In addition, any profit distribution is considered as taxable income, which could increase the tax liability of the saver.

The account can be a blessing for families who may have had 529 transfer money left and want to avoid a tax penalty for making unqualified benefits. And why not? Currently, the Internal Revenue Service allows these accounts to be transferred from one beneficiary to another, but if there are no other students who can use the money, the account owner is faced with allowing sitting or accepting the tax bite . How fair is that? (For more information, see 5 secrets you didn’t know about a 529 plan. )

One thing that does not address the bill is how distributions from 529 student loan plans are treated in terms of student loan deductions. The tax code prohibits double-dipping when it comes to claiming multiple credits or discounts for the same education costs in one year. If the law becomes law, there may be a question as to whether owners of 529 plans could use these tax benefits to pay student loans and still demand a deduction for interest paid.

The bottom line

The bottom line

HR 529 still works through Congress and it remains to be seen what definitive form it will take when it becomes law. In the meantime, parents can continue to transfer money to 529 accounts on behalf of eligible beneficiaries. For 2017, married couples can contribute up to $ 28,000 per child to a 529 without the federal gift tax.

Students dealing with educational debt are limited to exploring existing options to make their loans more manageable. Consolidation, refinancing or the pursuit of a revenue-based repayment plan are all options, but borrowers must carefully consider each of them. Student loans: real-life ways to dump your debt can help you choose the best approach for now.