New Law Allows 529 Plans to Repay Student Loans

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Kathryn Flynn

By Kathryn Flynn

December 19, 2019

President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which aims to improve savings habits in the United States. The legislation expands the benefits of 529 college savings plans, including adding student loan repayments and cost of apprenticeship programs as qualified expenses. The new 529 rules apply to distributions made after December 31, 2018.

A previous version of the bill also included additional provisions related to 529 plans, but these expansions were dropped earlier in 2019. For example, the final legislation does not include provisions to allow 529 plans to pay for homeschooling or educational therapy for students with disabilities or to expand qualified K-12 expenses for 529 plans.

529 plans to repay student loan debt

The SECURE Act allows 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, the portion of student loan interest that is paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.

The law 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. A 529 plan account owner may change the 529 plan beneficiary at any time without tax consequences.

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.

The new 529 rules also present an opportunity for grandparents who want to help a grandchild pay for college without affecting financial aid eligibility. Distributions from a grandparent-owned 529 plan are considered untaxed student income on the Free Application for Federal Student Aid (FAFSA) and can reduce a student’s financial aid package by up to 50% of the value of the distribution. Grandparents can avoid this by waiting until January 1 of the student’s sophomore year of college (when it will no longer affect untaxed income on the FAFSA) to take a 529 plan distribution or wait until the student graduates to pay down their student loans.

New 529 rule to pay for apprenticeships

The SECURE Act also allows 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. The Department of Labor provides a search tool to find out if a particular apprenticeship program is eligible.

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 can be used to pay for the following expenses associated with apprenticeship programs:

  • Fees
  • Textbooks
  • Supplies
  • Equipment, including tools required for trades

The Kiddie Tax

The SECURE Act also includes changes that lower the Kiddie Tax, which is the tax imposed on a child’s passive income from dividends, capital gains, taxable interest, taxable scholarships and income from gifts and custodial accounts. 

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