The House Ways and Means Committee released legislative language for Tax Reform 2.0 on September 10, 2018. Among other provisions affecting 529 college savings plans, the legislation proposes to allow families to use 529 plans to repay student loans.
The Tax Reform 2.0 package consists of three bills
- The Protecting Family and Small Business Tax Cuts Act of 2018 (H.R. 6760) makes permanent several provisions from the Tax Cuts and Jobs Act of 2017, including several provisions affecting 529 plans and ABLE accounts.
- The Family Savings Act of 2018 (H.R. 6757) expands the definition of qualified expenses for 529 plans and creates Universal Savings Accounts (USA).
- The American Innovation Act of 2018 (H.R. 6756) encourages business innovation.
Using 529 Plans to repay student loans
The Tax Reform 2.0 legislation will allow 529 plans to be used to make tax-free payments of principal and interest on qualified education loans of the beneficiary and the beneficiary’s siblings, starting in 2019. Distributions to repay student loans would be considered qualified higher education expenses.
There will be an aggregate lifetime limit of $10,000 per borrower. So, a beneficiary’s 529 plan could be used to repay up to $10,000 in student loans borrowed by the beneficiary and up to $10,000 in student loans for each of the beneficiary’s siblings. The definition of sibling includes brother, sister, stepbrother and stepsister.
Qualified education loans include federal and private student loans, as defined in 26 USC 221(d). Interest repay with a qualified distribution from a 529 plan will not be eligible for the student loan interest deduction.
Although the legislative language, as currently drafted, would not allow a 529 plan to repay Federal Parent PLUS loans borrowed by the beneficiary’s parent on behalf of the beneficiary, there is a potential workaround. The account owner can change the beneficiary of a 529 plan account to the current beneficiary’s parent and then take a qualified distribution to repay up to $10,000 in Federal Parent PLUS loans. (Note that the beneficiary of a custodial 529 plan account cannot be changed.)
The legislative language seems flexible enough to allow 529 plans to be used to implement student loan forgiveness programs.
Other financial aid benefits
The Tax Reform 2.0 legislation will make permanent several provisions for the Tax Cuts and Jobs Act of 2017, eliminating the 2025 sunset. These include:
- Rollovers from 529 plans to ABLE accounts
- Saver’s Credit for ABLE contributions by the account holder
- Increased ABLE contributions for working beneficiaries
- Exclusion from income for death and disability discharges of student loans
The legislation will also expand 529 plan qualified education expenses for K-12 education.
- For enrollment or attendance at an elementary or secondary school, qualified expenses include tuition, fees, academic tutoring, books, supplies and equipment, as well as special needs services for special needs beneficiaries.
- For enrollment in a homeschool, qualified expenses include books and other instructional materials, curriculum and curricular materials, online education materials, tutoring and educational classes outside the home, dual enrollment in a college or university, and educational therapy for students with disabilities. Note that the tutor or instructor may not be related to the student.
The legislation also allows qualified education expenses to include fees, books, supplies and equipment required for participation in a certified apprenticeship program, such as those registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act [29 USC 50].
The expansion of the definition of qualified education expenses will be effective starting in 2019.
Universal Savings Accounts (USA)
The Tax Reform 2.0 legislation will create new Universal Savings Accounts that can be used to save for any purpose, tax-free.
Universal Savings Accounts have an annual contribution limit of $2,500, capped by earned income. Contributions must be made in cash. The annual contribution limit will be adjusted annually by a cost of living adjustment, rounded down to the next lower multiple of $100. No contributions are permitted for dependents.
Excess contributions can be offset by distributions during the previous and current tax year through the due date for the account owner’s federal income tax return. Excess contributions will otherwise be subject to confiscatory tax rates.
Distributions are excluded from income. There are no income phase-outs.
Universal Savings Accounts are not subject to community property laws.