Lana Oconnell
Recent changes in federal law now allow individuals to use their 529 plan to pay off student loan debt. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 permits 529 plan holders to make penalty-free withdrawals to pay off student loan debt for the designated beneficiary and each of their siblings, up to a lifetime maximum of $10,000 per person. This change in legislation has expanded the functionality of 529 plans, which were originally intended to cover higher education expenses.
| Characteristics | Values |
|---|---|
| Can I use a 529 plan to pay off student loans? | Yes, thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, 529 plan holders can make penalty-free withdrawals to pay off student loan debt for the designated beneficiary and each of their siblings, up to a lifetime maximum of $10,000 per person. |
| What is a 529 plan? | A 529 plan is a type of tax-advantaged college savings vehicle. A 529 plan can be used to pay for the designated beneficiary's post-secondary education expenses. |
| What is the benefit of a 529 plan? | Contributions to 529 accounts grow tax-deferred and withdrawals are tax-free if used for qualified education expenses. |
| Can I use a 529 plan for anything other than student loans? | Yes, 529 plans can also be used to pay for K-12 education, trade schools, and other qualified programs. Additionally, 529 plans can be rolled over into a Roth IRA, a tax-free retirement account. |
| Are there any limitations to using a 529 plan for student loans? | Yes, the SECURE Act only allows up to $10,000 in a 529 to be used for student loan repayment per borrower. Also, not all states allow the use of 529 plan withdrawals for student loans, so it is important to check the specific rules of your state. |
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What You'll Learn
Using a 529 plan to pay off student loans tax-free
A 529 plan is a tax-advantaged college savings vehicle that can be used to pay for a designated beneficiary's post-secondary education expenses. While it was originally intended for college tuition costs, legislative changes have expanded the functionality of 529 plans. Now, not only can they be used for K-12 tuition and trade schools, but also for repaying student loan debt.
Using a 529 Plan to Pay Off Student Loans
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 allows 529 plan holders to make penalty-free withdrawals of up to $10,000 per beneficiary to repay student loan debt. This includes the designated beneficiary and each of their siblings, with a lifetime maximum of $10,000 per person. For example, a family with three children could withdraw a total of $30,000 to pay off student loans.
It is important to note that the SECURE Act only permits withdrawals from 529 plans to repay the principal and/or interest on qualified education loans. Additionally, the portion of student loan interest paid by these distributions is ineligible for the student loan interest tax deduction for regular income taxes.
Strategies for Maximizing the Benefits of a 529 Plan
To maximize the benefits of a 529 plan, individuals can consider the following strategies:
- Smart Planning: By engaging in smart planning, individuals can set up their 529 plans to pay off more than the $10,000 limit. For example, if a borrower receives $10,000 in 529 plan distributions and then refinances the remaining debt into someone else's name, the new loan might be eligible for another $10,000 in qualified distributions, provided that the new borrower has not reached their $10,000 limit.
- Subsidized Student Loans: If eligible, individuals can take out subsidized loans, which don't accrue interest until after graduation, and let their 529 plan grow over time. Then, upon graduation, they can pay off the loan with their potentially larger 529 balance.
- State Tax Benefits: Some states offer special tax benefits for 529 plan contributions, making it advantageous to research and understand the specific rules and benefits offered by your state.
- Long-Term Planning: 529 plans are designed for long-term planning, allowing contributions to accumulate tax-free over many years, providing a larger balance for future education expenses.
Limitations and Considerations
While using a 529 plan to pay off student loans can be beneficial, there are some limitations and considerations to keep in mind:
- Lifetime Limit: The SECURE Act established a lifetime limit of $10,000 per beneficiary for student loan repayment. This limit applies across all 529 plans, so withdrawing from multiple plans will not bypass the limit.
- State Rules: While federal law permits 529 plan withdrawals for student loans, not all states have updated their rules to allow this. It is important to check the specific rules and regulations of your state.
- Tax Implications: Withdrawals from 529 plans for unauthorized purposes, such as non-education expenses, are typically subject to income taxes and an additional penalty.
- Impact on Financial Aid: Withdrawals from a grandparent-owned 529 plan to pay for college expenses may affect the student's eligibility for need-based financial aid.
In conclusion, while a 529 plan can be used to pay off student loans tax-free, it is important to understand the limitations and rules surrounding these withdrawals. By utilizing smart planning strategies and taking advantage of the expanded functionality of 529 plans, individuals can maximize their benefits and effectively manage their education-related finances.
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The $10,000 limit per borrower
It's important to note that the $10,000 limit is a lifetime maximum per individual, and it is not an annual limit. This means that you can't use the 529 plan to pay off $10,000 of student loan debt every year. Additionally, the $10,000 limit is specifically for paying off existing student loan debt and doesn't include other educational expenses, such as K-12 tuition or college costs.
While the $10,000 limit per borrower is a key consideration when using a 529 plan to pay off student loans, it's also important to be aware of other rules and limitations. For example, the SECURE Act only allows 529 plans to be used for qualified education loans, and there may be other restrictions on how and when you can access the funds. Additionally, it's worth noting that 529 plans have maximum aggregate contribution limits, which range from $235,000 to $529,000 depending on the state. These limits are intended to cover the cost of attending an expensive college or graduate school within the state.
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The SECURE Act of 2019
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the definition of qualified distributions from a 529 plan. It allows 529 plans to be used to pay off the principal and/or interest on qualified education loans of the beneficiary and the beneficiary's siblings. The SECURE Act was signed into law on December 20, 2019, as part of the 2020 federal budget appropriations bill. It was later updated by the SECURE 2.0 Act, signed into law on December 29, 2022.
The SECURE Act makes it easier for Americans to save for retirement by allowing them to invest more money in tax-advantaged accounts and withdrawing it later. It also makes it easier for small businesses to set up 401(k) plans for their employees and expands the range of investment options. The act pushed back the age at which retirement plan participants need to take required minimum distributions (RMDs) from 70½ to 72, and allows traditional IRA owners to make contributions indefinitely.
The SECURE Act also allows for penalty-free 529 distributions for the purpose of repaying a beneficiary's student debt, up to a lifetime limit of $10,000. This limit is per borrower, not per 529 plan. The definition of a sibling includes brothers, sisters, stepbrothers, and stepsisters. The account owner can change the beneficiary to a parent and use this to pay off up to $10,000 of parent education loans. It's important to note that the portion of student loan interest paid by these distributions is ineligible for the student loan interest tax deduction for regular income taxes.
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State-specific rules for 529 plans
529 plans are sponsored and run by the 50 states and the District of Columbia, and the rules and fees differ from state to state. States generally set the contribution limit for their 529 accounts, with state maximums ranging from $235,000 to $597,000 or $621,411 in New Hampshire.
Some states offer additional tax benefits, such as deductions or credits for contributions to in-state 529 plans. For example, in California, withdrawals for registered apprenticeship programs and student loans can be made free from federal and California income tax. However, if you are not a California taxpayer, these withdrawals may include a recapture of tax deduction, state income tax, and penalties.
In Nevada, there are certain restrictions on rollovers to a Roth IRA. These rollovers can only be made from accounts open for at least 15 years and cannot include contributions or earnings made in the last 5 years.
The definition of "qualified expenses" varies from state to state. For example, transportation and travel costs are generally not considered qualified expenses, but they may be if your college includes transportation fees within a comprehensive tuition fee or identifies them as required for enrollment. Similarly, health insurance is typically not a qualified expense, but it may qualify if your institution requires it for enrollment.
It is important to review the specific rules and tax benefits of your state's 529 plan to understand the potential advantages and limitations.
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529 plans for K-12 education
A 529 plan is a tax-advantaged college savings vehicle that allows for the prepayment of future tuition costs at today's prices. While 529 plans are primarily intended for higher education expenses, legislative changes have expanded their functionality.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the definition of qualified distributions from a 529 plan. It allows for penalty-free distributions of up to $10,000 per borrower to repay the principal and/or interest on the beneficiary's student debt. This is a lifetime limit that applies to each beneficiary and their siblings.
In addition to the SECURE Act, the Tax Cuts and Jobs Act (TCJA) of 2017 expanded the Qualified Tuition Program (QTP) rules, allowing 529 plans to be used for K-12 education expenses. Investors can withdraw up to $10,000 per year, or the cost of tuition, whichever is less, for K-12 tuition without incurring federal taxes or penalties. This flexibility in using 529 plans for K-12 tuition can help build wealth through tax savings.
However, it is important to note that not all states follow federal law regarding K-12 tuition as a qualifying expense. As of July 4, 2025, additional K-12 expenses such as books, materials, tutoring, exam fees, and educational therapies are also considered qualified expenses. Families may consider opening separate 529 plans for K-12 and college tuition to avoid impacting potential growth contributions for college expenses.
While 529 plans offer tax advantages and flexibility, it is essential to understand which costs qualify for tax-free withdrawals to maximize savings and avoid penalties on non-qualified withdrawals.
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Frequently asked questions
Yes, you can use a 529 plan to pay off student loans. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the definition of qualified distributions from a 529 plan, allowing them to be used to repay the principal and/or interest on qualified education loans of the beneficiary and the beneficiary's siblings.
Qualified distributions are limited to $10,000 per borrower. This is a lifetime limit that applies to distributions from all 529 plans.
Yes, the account owner can change the beneficiary to a parent and use this to pay off up to $10,000 of parent education loans.
Yes, the SECURE Act also allows for additional withdrawals of up to $10,000 for each of the beneficiary's siblings.
