Janice Lozano
Student loan debt can be a burden, but various options are available to help manage it. One option is to use a 529 plan, which allows individuals to save for college expenses for a designated beneficiary. While the primary purpose of 529 plans is to cover higher education expenses, legislative changes have expanded their use. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 allows 529 plan holders to withdraw funds to repay student loan debt for the beneficiary and their siblings, up to a lifetime maximum of $10,000 per person. This change provides flexibility for families managing college costs and student loan debt. However, it's important to note that not all states follow the federal definition of qualified expenses, and certain rules and limitations apply to 529 plan withdrawals for student loan repayment.
| Characteristics | Values |
|---|---|
| Maximum amount | $10,000 per borrower |
| Applicability | Beneficiary and their siblings |
| Tax | Tax-free |
| Penalty | Penalty-free |
| Student loan interest tax deduction | Ineligible |
| Student loan interest | Ineligible |
| State income tax | Applicable |
| Student loan debt repayment | Allowed |
| Student loan debt repayment after graduation | Allowed |
| Student loan debt repayment for graduate school | Allowed |
| Student loan debt repayment for apprenticeship | Allowed |
| Student loan debt repayment for K-12 tuition | Allowed |
| Student loan debt repayment for room and board | Allowed |
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What You'll Learn
Student loan repayment limits
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 allows families to use 529 plans to pay back student loans. However, there are certain limitations and rules that need to be considered.
Limitations
The lifetime limit for 529 plan withdrawals for student loan repayment is \$10,000 per borrower or beneficiary. This limit applies across all 529 plans, so having multiple 529 plans does not increase the amount. For example, a family with two children can use $10,000 per child to repay their student loan debt, but the total amount used from all 529 plans cannot exceed $10,000 per child.
The definition of a beneficiary's sibling includes brothers, sisters, stepbrothers, and stepsisters. The account owner can change the beneficiary to a parent and use up to \$10,000 to pay off the parent's education loans.
Rules
The student must have been enrolled in a college or university eligible for Title IV federal student aid. Qualified higher education expenses are based on the definition of the cost of attendance in the Higher Education Act of 1965, which was in effect on August 4, 1997. Subsequent changes to this definition, such as allowances for the purchase of a personal computer, do not apply. Therefore, any loans that were used to pay for these additional costs are not eligible for repayment using 529 plans.
The SECURE Act established that student loan repayment is a qualifying education expense, allowing penalty-free withdrawals from 529 plans. However, the portion of student loan interest paid by these distributions is ineligible for the student loan interest tax deduction for regular income taxes. Additionally, in the case of grandparent-owned 529 plans, any money withdrawn to pay for college expenses is considered income to the student and must be reported on the Free Application for Federal Student Aid (FAFSA), which could affect the student's eligibility for need-based financial aid.
It is important to note that not all states have adopted the federal definition of qualified expenses. Therefore, using a 529 plan distribution to repay student loans may be considered non-qualified by the state, even if it is qualified by the IRS. As such, it is recommended to check the specific rules and regulations of your state before withdrawing from a 529 plan for student loan repayment.
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Qualified distributions
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which became law in December 2019, expanded the benefits of 529 plans by adding student loan repayments and the cost of apprenticeship programs as qualified expenses. This means that 529 plans can now be used to repay the principal and/or interest on qualified education loans of the beneficiary and the beneficiary's siblings.
The SECURE Act also allows for additional withdrawals of up to $10,000 for each of the beneficiary's siblings. For example, a family with three children could withdraw a total of $30,000.
It is 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. Additionally, some states have not adopted the federal definition of qualified expenses, so using a 529 plan distribution to repay student loans may be considered non-qualified by the state even if it is considered qualified by the IRS. As of 2025, there are still four states that don't allow it, including California.
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Tax implications
The Setting Every Community Up for Retirement Enhancement Act of 2019 (P.L. 116-94), also known as the SECURE Act, changed the definition of qualified distributions from a 529 plan. It allows 529 plans to be used to repay the principal and/or interest on qualified education loans of the beneficiary and the beneficiary's siblings. The lifetime limit for qualified distributions is $10,000 per borrower, and this applies to distributions from all 529 plans.
However, it's important to note that not all states have adopted the federal definition of qualified expenses. Therefore, using a 529 plan distribution to repay student loans may be considered non-qualified by the state, even if deemed qualified by the IRS. In such cases, the earnings portion of the distribution may be subject to state income tax, and there may be a recapture of any state income tax breaks. As of 2025, there are still four states that do not allow the use of 529 plans for student loan repayment, including California.
When it comes to the Student Loan Interest Deduction, there is a coordination restriction that reduces eligibility when a borrower's student loans are repaid using a qualified distribution from a 529 plan. The Student Loan Interest Deduction provides taxpayers with an above-the-line exclusion of up to $2,500 in interest paid on qualified education loans. If the earnings portion of a $10,000 distribution exceeds $2,500, the borrower will not be eligible for the deduction that year.
Additionally, in the case of a grandparent-owned 529 plan, any withdrawals used to pay for college expenses are considered income to the student and must be reported on the Free Application for Federal Student Aid (FAFSA). This could impact the student's eligibility for need-based financial aid. However, the SECURE Act offers grandparents a way to help without affecting financial aid eligibility. Grandparents can now wait until after their grandchild graduates to take a 529 plan distribution, which can be used to repay student loan debt up to $10,000.
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Eligibility criteria
The SECURE Act
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which became law in December 2019, expanded the benefits of 529 plans. It allows for penalty-free 529 distributions for the purpose of repaying a beneficiary's student loan debt, up to a lifetime limit. This limit is set at $10,000 per borrower, not per 529 plan. So, if a borrower has received $10,000 in 529 plan distributions and then refinances the remaining debt into someone else's name, the new borrower may be eligible for another $10,000 in distributions, provided they haven't reached their own limit.
Qualified Education Loans
The SECURE Act changed the definition of qualified distributions from a 529 plan. Now, the principal and/or interest on qualified education loans of the beneficiary and their siblings can be repaid using a 529 plan. The definition of a sibling includes brothers, sisters, stepbrothers, and stepsisters.
Qualified Expenses
Qualified higher education expenses are based on the definition of the cost of attendance in the Higher Education Act of 1965, which was in effect on August 4, 1997. Subsequent changes to this definition, such as allowances for the purchase of a personal computer, do not apply. Loans that were used to pay for these additional costs are not eligible for repayment using a 529 plan.
Eligible Institutions
The college or university must be eligible for Title IV federal student aid. Families can use a 529 plan to pay for online college courses, as long as the institution is eligible for federal student aid.
State-Specific Rules
It's important to note that not all states have adopted the federal definition of qualified expenses. Using a 529 plan distribution to repay student loans may be considered non-qualified by the state, even if it is qualified by the IRS. Therefore, it is essential to check your state's rules and regulations before withdrawing from a 529 plan to repay student loans.
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Alternative options
If you are looking for alternative options to pay back student loans, here are some strategies to consider:
- Refinancing: Refinancing your student loans with a private lender can provide several benefits. You may be able to extend your loan term, lower your monthly payments, or secure a lower interest rate if you meet certain eligibility requirements. It is important to note, however, that refinancing into a private loan may cause you to lose benefits associated with federal loans, such as income-driven repayment plans or loan forgiveness programs.
- Side hustles: Consider taking on additional work or side hustles to increase your income. This can help you generate extra funds specifically dedicated to paying off your student loans.
- Employer assistance: Some employers offer student loan repayment assistance as an employee benefit. Check with your employer or HR department to see if this is an option for you.
- Retirement savings: The SECURE Act and its updates have provided various options for those with student loans to save for retirement while paying down their debt. For example, you can now convert your 529 plan funds into a Roth IRA retirement account, allowing you to build retirement savings while also managing your student loan repayments.
- Life insurance policy: You can take out a loan against the cash balance of your life insurance policy to pay for educational expenses. However, it is important to carefully consider the potential impact on the death benefit payout and consult with a financial professional before making any decisions.
- Coverdell Education Savings Account: This option offers more flexibility on investments compared to a 529 plan but has stricter rules regarding contributions.
- Tax credits: The U.S. tax code offers two tax credits for students and families with qualified education expenses: the American Opportunity Tax Credit and the Lifetime Learning Credit. These credits can help offset the cost of tuition, fees, and course materials.
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Frequently asked questions
Yes, you can use a 529 plan to pay off student loans, but only up to a lifetime maximum of $10,000 per person without penalty. This limit is per borrower, not per 529 plan.
Yes, there are some limitations and rules you should be aware of. For example, the student must have been enrolled in a college or university that is eligible for Title IV federal student aid. Also, the definition of qualified distributions was changed by the SECURE Act of 2019, which allows 529 plans to be used to repay the principal and/or interest on qualified education loans of the beneficiary and their siblings.
Using a 529 plan to pay off student loans can help you avoid the 10% tax penalty on a non-qualified distribution, as well as the income tax on the distribution.
