The House Ways and Means Committee unanimously passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which aims to improve savings habits in the United States. The legislation proposes expanding the benefits of 529 college savings plans, including adding student loan repayments as a qualified expense.
The SECURE Act mainly focuses on changes to 401(k) plans and other retirement savings plans, but also includes important provisions related to 529 plans. These provisions also appear in the Family Savings Act, which the House Ways and Means Committee passed in the previous session of Congress as part of Tax Reform 2.0.
The SECURE Act has received bipartisan support and lawmakers are optimistic that the legislation will reach the president’s desk in 2019. The proposed changes will apply to 529 plan distributions beginning January 1, 2019.
529 plans to pay down student loans
The SECURE Act will allow families to take tax-free 529 plan distributions for student loan repayment. Principal and interest payments toward a qualified education loan will be considered qualified 529 plan expenses. However, student loan interest payments made using 529 plan funds will not be eligible for the student loan interest deduction.
The bill includes an aggregate lifetime limit of $10,000 in qualified student loan repayments per 529 plan beneficiary and $10,000 per each of the beneficiary’s siblings. Siblings may include a brother, sister, stepbrother or stepsister.
Many families use a combination of income, 529 plan savings and student loans to pay for college. Since there are no time limits imposed on 529 plans, the student may keep contributing to a 529 plan throughout college or after graduation and use any leftover funds to repay student loans tax-free.
529 plans to pay for homeschooling
Families who homeschool children typically pay an average of around $750 per year for each student. The SECURE Act will allow families to take tax-free withdrawals to pay for homeschooling expenses, including:
- Textbooks, curriculum and course materials
- Online education materials
- Tutoring or educational classes outside the home by a tutor who is not related to the beneficiary
- Dual enrollment programs offered through eligible colleges
- Educational therapy for students with disabilities
Expanding qualified K-12 expenses
The Tax Cuts and Jobs Act of 2017 expanded the definition of qualified higher education expenses to include up to $10,000 per year in K-12 tuition. The SECURE Act would allow families to use 529 plans to pay for the same qualified elementary and secondary expenses that are covered by Coverdell Education Savings Accounts, including:
- Tuition and fees
- Academic tutoring
- Special needs services
- Textbooks, supplies and equipment
529 plans to pay for apprenticeships
The SECURE Act includes legislation that will allow 529 plans to be used to pay for apprenticeship programs. To be considered a qualified 529 plan expense, the apprenticeship program must be registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act.
Apprenticeship programs are offered by employers and provide on-the-job training and instruction to prepare workers for a particular career. Apprenticeships are used in many industries, such as construction, manufacturing, health care, information technology, energy and logistics. According to the U.S. Department of Labor, apprentices earn an average starting wage of $15.00 per hour.
Some apprenticeship programs offer college credit through a community college or a four-year college. Costs of apprenticeships vary by the employer and type of job training. In some cases, the employer covers all or a portion of the instruction. Under the SECURE Act, tax-free distributions from 529 plans may be used to pay for the following expenses associated with apprenticeship programs:
- Fees
- Textbooks
- Supplies
- Equipment, including tools required for trades
