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Knowledge Hub / Can You Use a 529 Plan to Pay Student Loan Debt?
Can You Use a 529 Plan to Pay Student Loan Debt?

Can You Use a 529 Plan to Pay Student Loan Debt?

Living with Student Loans
ELFI | December 9, 2022
Can You Use a 529 Plan to Pay Student Loan Debt?

A 529 college savings plan is a tax-advantaged tool to save for a child’s education. However, there are some circumstances where you may have leftover dollars. If that’s the case, you may wonder, “can you use your 529 plan to pay down student loans?” Previously, student plans weren’t an acceptable use for 529 funds. But under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, that rule was changed, and now the federal government allows account holders to use their 529 plans to pay off up to $10,000 in student loan debt. However, the rules are strict, so you need to know the ins and outs before withdrawing. 

What is a 529 plan?

There are two forms of 529 plans: prepaid tuition and college savings. College savings plans are the more commonly used of the two because they allow people to invest and potentially grow their contributions over time.  A 529 plan is an investment account tied to a specific beneficiary. You can invest in stocks, mutual funds, and other securities, and your contributions can grow tax-deferred. Withdrawals made for qualifying education expenses, including college tuition, are tax-free. Expenses that qualify for 529 plans include: 

Withdrawals made for non-qualifying expenses are subject to income tax and penalties. 

Can you use a 529 plan for student loans?

Previously, account holders couldn’t use their 529 plans to repay student loans without incurring income taxes and penalties. However, the SECURE Act of 2019 changed that. Under the new federal law, 529 account holders can withdraw up to $10,000 for student loan repayment.  Using a 529 plan to repay student loans is an unusual use for the account; they’re typically used to pay for college expenses upfront. But there are a few scenarios where it may be a good idea:

Qualifications to Use a 529 Plan to Pay Student Loans

To utilize the SECURE Act’s provision for 529 plans and student loan repayment, you must meet the following requirements: 

Although the SECURE Act changed how the federal government handles 529 plans and student loan repayment, not all states have followed suit. Some states may prohibit the use of 529 plans for student loan repayment, so you may owe state income taxes and penalties if you withdraw money to repay your loans.  To find out how your state handles 529 withdrawals, check with your state education agency

Pros of Using a 529 Plan to Pay Student Loans

Cons of Using a 529 Plan to Pay Student Loans 

How to use 529 for student loans

If you decide to use some of your 529 funds to repay student loans, follow these steps: 

Alternatives to 529 Plans for Student Loan Repayment

If you don’t have enough funds in a 529 account to pay off your student loans or live in a state that prohibits using 529 dollars for student loan repayment, there are other ways to manage your debt: 

Speak to a Loan Advisor About Refinancing Your Student Loans

Although the SECURE Act made it possible to pay off a portion of your student loan debt with your 529 plan, it may not be enough to eliminate all of your loans. Refinancing your debt may be a smart strategy if you still have a balance.  You can get personalized guidance throughout the student loan refinancing process from a financial advisor. The benefits of talking to an ELFI loan advisor include: 

Set up an appointment with an ELFI loan advisor today!