Ibrahim Gardner
There are several options available for those looking to save for education expenses or pay off student loans. These include 529 plans, Coverdell ESAs, and the SAVE repayment plan. Each of these options has its own unique features, benefits, and limitations. For example, 529 plans offer tax-free withdrawals on qualified education expenses, while Coverdell ESAs have a broader range of qualified expenses. On the other hand, the SAVE repayment plan offers low monthly payments and a faster path to loan forgiveness but is currently under threat and may not be available after July 1, 2028. Understanding the specifics of each option can help individuals make informed decisions about their education savings and student loan repayment strategies.
| Characteristics | Values |
|---|---|
| Can education savings pay for student loans? | Yes, education savings can be used to pay for student loans. Education Savings Accounts (ESAs) and 529 Plans are popular options. |
| ESA contribution limit | $2,000 per beneficiary per year |
| ESA tax implications | Withdrawals are tax-free for qualified educational expenditures |
| 529 Plan contribution limit | Up to $18,000 in 2024 |
| 529 Plan tax implications | Withdrawals are tax-free for qualified higher education expenses |
| SAVE Plan | Federal student loan repayment plan introduced by President Biden in 2023; offers low monthly payments and faster loan forgiveness |
| SAVE Plan interest resumption | Interest resumed on August 1, 2025 |
| SAVE Plan end date | July 2028 |
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What You'll Learn
529 Plan withdrawals
A 529 plan is a savings tool for education that offers tax-free withdrawals on qualified expenses. It can be used to pay for a wide range of education expenses, including tuition and fees at eligible institutions, elementary and secondary schools, and post-secondary schools such as community colleges, four-year colleges, universities, graduate schools, and trade and vocational schools.
When withdrawing from a 529 plan, it is important to understand the rules and only withdraw the amount needed for qualified expenses to avoid taxes and penalties. Qualified expenses include tuition, fees, books, supplies, equipment, computers, and room and board if the student is enrolled at least half-time. The definition of qualified expenses has been expanded to include professional training, apprenticeships, credentialing, certification programs, and continuing education programs. There is no annual limit on how much can be withdrawn for college expenses, but there are limits on certain expenses, such as a $10,000 annual withdrawal limit for K-12 tuition expenses.
If you accidentally withdraw too much, you have 60 days to return the excess funds to a 529 account for the same beneficiary to avoid taxes and a 10% penalty. If you miss this deadline, you may be able to roll the excess into another 529 plan or prepay next year's expenses. Additionally, the 10% penalty may be waived on a non-qualified distribution up to the amount of any scholarships received.
It is important to note that not all education expenses qualify for tax-free withdrawals, and the rules for what constitutes a qualified expense can be complicated. For example, withdrawals for a tuition bill in December for a course starting in January may not qualify as a qualified higher education expense during the year of withdrawal. Therefore, it is recommended to carefully manage withdrawals and consult a tax professional before making distributions.
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Education Savings Accounts (ESAs)
ESAs provide families with direct control over public education funds, allowing them to customize their children's learning experiences. They differ from traditional vouchers and tax-credit scholarships in that they offer participating students individual accounts funded by the state, typically based on per-pupil funding formulas. This gives parents the flexibility to use the funds to tailor their child's education to their specific needs. For example, they can save funds from quarter to quarter or school year to school year to pay for future educational expenses, such as college tuition or more expensive learning therapies.
While ESAs offer unprecedented flexibility and are gaining popularity, there are concerns about funding adequacy, program accountability, and long-term academic outcomes. Opponents point to inconclusive research on the academic efficacy of ESA-funded programs and worry about the lack of academic testing or financial accountability requirements for parents. They argue that the funds devoted to ESAs would be better utilized in strengthening public school services.
It is worth noting that ESAs are just one type of education savings option. Other alternatives include 529 plans and Coverdell Education Savings Accounts (formerly known as Education IRAs). 529 plans offer tax-advantaged savings for college expenses, while Coverdell ESAs are funded through personal funds and can be used for K-12 and college expenses.
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Prepaid tuition plans
Most prepaid tuition plans only cover the cost of tuition and do not cover other expenses such as room and board, healthcare costs, and materials. However, some plans can be applied to graduate school tuition, and most states guarantee that the funds will keep pace with tuition.
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Student loan refinancing
When refinancing student loans, you can choose a shorter loan term to pay off your loan faster and pay less interest overall. You can also extend your loan term to lower your monthly payments. Refinancing also allows you to combine multiple loans into one, making repayment easier to manage. Additionally, if your credit score has improved, refinancing can help you release a cosigner from responsibility for your loan.
There are several lenders that offer student loan refinancing, including SoFi, Earnest, Citizens, and ELFI. When comparing lenders, it is important to consider interest rates (fixed vs. variable), repayment terms, and monthly payments. You can use services like Credible to compare prequalified offers from trusted lenders with no impact on your credit score.
If you are currently on the SAVE plan, you may want to consider refinancing as an alternative. However, experts warn that refinancing federal loans can result in losing access to certain forbearance, forgiveness, and bankruptcy protections. Therefore, it is important to carefully evaluate your financial situation and goals before deciding to refinance your student loans.
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Income-driven repayment plans
The SAVE plan, introduced by the Biden Administration, was deemed illegal by a federal appeals court, and the 8th Circuit Court of Appeals issued an injunction against its implementation. As a result, the Trump Administration revised the income-driven repayment plan application to comply with the ruling. Borrowers on the SAVE plan must transition to a new plan by July 2028, when the plan will be eliminated, or they will be automatically moved to the Repayment Assistant Plan (RAP).
For those who cannot afford full student loan payments, staying on the SAVE plan while forbearance is in effect is an option. However, missed or late student loan payments can negatively impact credit scores, just like any other debt.
There are several alternatives to the SAVE plan for those with federal student loans. One option is to refinance with a private student loan, although experts warn about losing access to the hardship protections that come with federal loans. Federal student loan rates are fixed annually, and for the academic year 2025-2026, the rate is 6.39% for undergraduate loans, 7.94% for unsubsidized graduate or professional loans, and 8.94% for PLUS loans.
Another alternative is to calculate the results of different strategies and optimize the path that results in the lowest payment over the lifetime of the loan. This may involve securing a lower monthly payment or a better rate with a different student loan option.
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Frequently asked questions
A 529 plan is a tax-advantaged investment account that families can use to save for college. It allows for tax-free deposits and withdrawals, as long as the money is used for qualified higher education expenses.
Qualified higher education expenses include tuition and fees at eligible post-secondary institutions, as well as some elementary and secondary school expenses.
Yes, the original legislation allowed 529 plan withdrawals to be used for student loan repayment costs. However, it is worth noting that not all student loan borrowers have enough 529 savings to significantly pay down their loans, and there may be other options to consider for repayment, such as refinancing or alternative repayment plans.
