New Law Expands Uses for 529 College Savings Accounts

New Law Expands Uses for 529 College Savings Accounts

The College Savings Plans Network says there are about 14 million open 529 accounts holding an average of $25,000 each.

The average student loan burden for college graduates with debt is about $30,000. So $10,000 from a 529 account by itself is not going to solve the student loan problem, said Carrie Warick, director of policy and advocacy for the National College Access Network, a nonprofit group that advocates on behalf of low-income students. “If you have significantly greater than $10,000 in loans,” she said, “it’s not a game-changer.”

Here are some questions and answers about the new 529 rules:

Can I use 529 money to repay private student loans, as well as federal loans?

The provision applies to federal and most private student loans.

Can I use 529 funds to pay an education loan I took out for my child?

The Secure Act’s provisions apply to student loans held by the 529 account’s beneficiary or the beneficiary’s siblings. But there is a workaround, Mr. Kantrowitz said. For example, a parent, as the owner of a 529 account with a child named as the beneficiary, could make a change and designate himself or herself as its beneficiary and take a $10,000 distribution to repay federal or private parent loans.

Depending on how much money was left in the account, the family could first use $10,000 to repay a child’s loans and another $10,000 for a sibling’s loans, before making the beneficiary change and taking a distribution to repay the parent loan, he said.

When do the new 529 rules take effect?

The new 529 rules are retroactive to the beginning of 2019. But account holders may want to be cautious and check with their own 529 plan before withdrawing funds. The new rules are in effect for federal tax purposes, but it’s possible that some state 529 programs will not follow along and recognize student loan payments or apprenticeship costs as eligible expenses. (That happened with the earlier change that allowed 529 funds to be used to pay for pre-college education costs.) Account holders in states that do not go along with the new federal rules may be subject to state income taxes and penalties, or possibly a repayment of state tax breaks. The various 529 plans are evaluating the new law, Mr. Frerichs said, and it could be weeks or months before the issue is settled in each state.

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