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 Calculate the Break-Even Age for Taking Social Security
social security

How to Calculate the Break-Even Age for Taking Social Security

When it comes to maximizing your Social Security benefits, there are many elements to consider. One factor that can be especially enlightening is your…
August 30, 2021
Spend Without Worry in Retirement
Financial Planning

Spend Without Worry in Retirement

Fears of running out of money prevent many retirees from tapping the nest egg they’ve worked a lifetime to save. With these strategies, you can genera…
August 30, 2021

Recommended

Pandemic Unemployment Benefits End — This Relief Is Still Available
health insurance

Pandemic Unemployment Benefits End — This Relief Is Still Available

You may be eligible for help with healthcare, your rent and more.
September 13, 2021
Free (or Cheap) College for Retirees in All 50 States
retirement

Free (or Cheap) College for Retirees in All 50 States

Whether it's to complete a degree, gain new knowledge or just for fun, retirees can collect their books and get on (back) to school in a most inexpens…
August 25, 2021
11 Things You Don’t Need for College
college

11 Things You Don’t Need for College

College sticker shock when you first see the bill for tuition, room and board (and all those nebulous activity fees) is bad enough.
August 13, 2021
Consider These Programs to Help You Repay Your Student Loans
student loans

Consider These Programs to Help You Repay Your Student Loans

Check to see if you qualify for one of the income-driven repayment plans or a loan forgiveness program.
August 11, 2021