Can You Use 529 Funds to Pay Off Student Loans?

Can 529 Funds Be Applied to Your Student Loan?

In December 2019, President Donald Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act into law. One of the provisions of the law is that 529 plan owners can use their funds to pay off up to $10,000 of the account beneficiary’s student loans.

That $10,000 lifetime limit is per beneficiary, however, not per account. So, you can change one account’s beneficiary to each of the original beneficiary’s siblings and pay up to that limit in student loans with no penalties or tax consequences. Further withdrawals may be subject to income taxes and a penalty, though.

Pros and Cons of Using Your 529 Funds to Pay Student Loans

While it may seem like a no-brainer, there are both benefits and drawbacks to putting 529 plan money toward student loans. Here’s what to consider.

Pros

• There’s no age limit on contributions. Unlike the Coverdell Education Savings Account, there’s no age limit on a 529 plan for beneficiaries when you first open the account or for taking distributions. As a result, you can contribute to a 529 plan for yourself, a child or a grandchild, even after they’ve graduated from college.
• There are tax benefits. The funds in a 529 plan grow tax-free as long as you use the money for eligible expenses. What’s more, some states offer tax deductions or credits on your contributions.
• You can change beneficiaries. If you opened a 529 plan for your child and have money left over after paying their college costs and the $10,000 maximum student loan payment, you can make another child the beneficiary and help them, too, without worrying about tax consequences.

Cons

• It may not cover all the debt. With a $10,000 limit, you may not be able to pay enough to eliminate the beneficiary’s student loan debt. The average student loan balance in 2021 was $39,487, according to Experian data.
• You can’t double-dip on tax benefits. Student loan borrowers can typically deduct up to $2,500 in student loan interest every year. But if you use your 529 plan to make payments, any interest paid is ineligible for the student loan interest deduction because you’re already enjoying tax benefits from the 529 plan.

How to Pay Off Your Student Loans

Whether or not you’re considering using a 529 plan to pay student loans, here are some other approaches you can take to pay off your student debt more quickly:

• Refinance your student loans. Student loan refinancing could help you secure a lower interest rate than what you’re currently paying and even reduce your repayment term. That said, if you have federal student loans, refinancing them with a private lender will cause you to lose benefits, including income-driven repayment plans, forgiveness programs and payment pauses.
• Pay extra every month. Even if it’s just a little, paying extra every month can shave off hundreds of dollars in interest over time and months off your repayment term.
• Make a half-payment every two weeks. If you pay half your student loan payment every two weeks, you’ll end up with 26 half-payments or the equivalent of 13 monthly payments every year.
• Use windfalls to pay off debt. If you receive a tax refund every year or performance bonuses at work, consider putting at least some of those funds toward student loans.
• Seek help making payments. If you have federal student loans, you may be able to qualify for student loan forgiveness or repayment assistance programs offered by federal and state agencies. Even some private companies offer student loan repayment assistance as an employee benefit, and it doesn’t matter whether you have federal or private student loans.

Build Credit to Save Money on Student Loans and Other Debt

If you choose to refinance your student loans, your interest rate can depend, in part, on your credit history. If you’ve taken the time to build credit, you’ll have a better chance of scoring a low rate. If you haven’t worked on your credit much, now is a good time to get started.

Monitor your credit regularly as you work on building credit to track your progress. Even if you decide against refinancing, establishing a good credit score can help you qualify for better terms with other types of debt in the future.