Paying for College

A New Way to Repay College Loans

Parents may now use money from their 529 college-savings plans to help their children pay off student loans.

A little-known provision tucked into a law enacted at the end of 2019 allows parents to use money from their 529 college-savings plans to help their children pay off their student loans.

A provision in the SECURE Act (see Some Heirs Could Face a Tax Squeeze) allows owners of 529 plans to withdraw up to $10,000, tax-free, to make payments on the plan beneficiary’s student loans. Account owners can also withdraw up to $10,000 to repay loans for each of the beneficiary’s siblings.

In the past, families who had a balance in a child’s account had to change the beneficiary or pay taxes and penalties on earnings to withdraw the money.

Before withdrawing 529 money to repay student loans, check with your state’s plan. Although many states will likely conform with the federal law, some may require you to return state tax deductions or credits you received if the money is used to repay student loans, says Ross Riskin, an assistant professor of taxation at the American College of Financial Services.

Grandparents who have saved in a separate 529 plan could see benefits, too. Withdrawals from a grandparent-owned 529 plan are reported as untaxed student income, which can reduce a student’s financial aid package by up to 50% of the distribution amount. Now, grandparents can also use the money to help their grandchildren repay their loans.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
How to Know When You Can Retire
retirement

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022
The 10 Best Closed-End Funds (CEFs) for 2022
CEFs

The 10 Best Closed-End Funds (CEFs) for 2022

These high-yielding CEFs won't just significantly boost your portfolio income. They'll also allow you to buy their underlying stocks and bonds at a di…
January 12, 2022

Recommended

Biden Extends Suspension of Student Loan Payments
loans

Biden Extends Suspension of Student Loan Payments

The president gave borrowers another 90 days until May 1 before they have to start paying back their student loans.
December 22, 2021
The Return of Student Loan Payments
Paying for College

The Return of Student Loan Payments

A pandemic reprieve on student loan payments ends in January. If you still need financial help, there are steps you can take.
November 22, 2021
How to Balance Saving for Retirement and Your Kids’ Education
college

How to Balance Saving for Retirement and Your Kids’ Education

Achieving your goals takes patience and time – but starting early will give you a big edge. And while it may feel unnatural, put yourself (and your re…
October 29, 2021
Thoughts Before Funding a 529 College Savings Plan
college

Thoughts Before Funding a 529 College Savings Plan

Watching your college savings grow tax-free with a 529 college savings plan feels great, but failing to follow the rules could come with penalties and…
October 23, 2021