A new law allows borrowers to use 529 college savings plans to pay off student loan debt.
Families concerned about both paying for college and tackling postgraduation student debt now have more options: The rules governing how 529 college savings plans can be used have expanded again.
First introduced in 1996, 529 plans offer parents a way to save for college expenses for a designated beneficiary. Families contribute money after taxes to these accounts, which grows on a tax-deferred basis and can be withdrawn tax-free if it’s used to pay for qualified education expenses. In addition, some states offer special tax benefits for 529 plan contributions.
A law signed by President Donald Trump in December 2019 added a new qualified expense that can be paid for by 529 plans: student loans.
The Setting Every Community Up for Retirement Enhancement Act, a spending bill known as the SECURE Act, established a lifetime limit of $10,000 from a 529 plan that can be used without any penalties or tax consequences to repay the beneficiary’s student loans, including federal and most private loans. An additional $10,000 can be used to repay student loans held by each of the beneficiary’s siblings.
Prior to these changes, any withdrawals for the purpose of student loan payments were subject to income taxes and other penalties. The new 529 plan rules begin retroactively, starting with the beginning of 2019.
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