Since tax-advantaged 529 savings plans were introduced in 1996, they have helped millions of families save for college and other education expenses for their children and grandchildren. Over the years, legislators have continued to expand the qualified expenses families can use a 529 plan for, including the option to help pay for private K-12 tuition, repay student loans and pay for apprenticeship expenses. In this article, we’ll provide information about using the funds in a 529 plan to repay student loans.

A SECURE Option for Shrinking Student Loan Debt

In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. It allows a lifetime limit of up to $10,000 to be withdrawn from a 529 plan, without penalties or tax consequences, to repay a beneficiary’s student loans, including federal and most private loans. 

An additional $10,000 for each of a beneficiary’s siblings can be withdrawn from a 529 account to pay down the student loans of the beneficiary’s siblings. Siblings can include a brother, sister, stepbrother, or stepsister.

Reasons for Choosing This Option 

Families might use the funds in a 529 savings account to repay student loans for many reasons. Below are a few scenarios in which you might choose to take advantage of this option. 

1. You Took Out Larger Loans than You Ultimately Needed. In some scenarios, students or family members have taken out student loans anticipating more extensive education expenses, only to realize (happily) that some student loan funds weren’t needed. Perhaps your student graduated in three years instead of four or received an unanticipated scholarship. Whatever the case, you can use your 529 funds to repay the loan. 

2. Other Beneficiaries Opted for Other Pursuits. Sometimes one or more younger siblings choose to attend community college, earn an associate’s degree, enroll in a military academy or simply pursue a career straight out of high school, leaving leftover 529 funds. These leftover funds can be used to repay student loan debts of other siblings who have already graduated from college or even a parent’s student loans.

3. Repay Parent Loans. Parents can use a 529 plan to repay their own student loans.  The SECURE Act allows limited qualified distributions from 529 plans to repay qualified education loans of the beneficiary and their siblings, but the account owner can change the beneficiary of a 529 plan to the beneficiary’s parent, so that the parent can take up to a $10,000 distribution to repay their own federal and private parent loans.

Understand the Restrictions

It's important to understand the restrictions around using a 529 plan to repay student loans. Beyond the $10,000 limit, there are a few key points families should be aware of before choosing this option. 

1. Student loan interest paid for with money from a 529 plan cannot be claimed as a deduction on your federal income taxes.

2. Though most federal and private student loans qualify, some forms of private loans don’t, including mixed-use loans. These loans don’t qualify as higher education loans because they can be used to pay for things other than education expenses. 

The Flexibility to Save For Whatever the Future Brings 

Flexibility is a key reason to save for future education using a 529 plan. Funds in a 529 plan can be used for college tuition and expenses, K-12 tuition, apprenticeship expenses, student loan repayment and much more. Leftover 529 funds may also be rolled into a Roth IRA for the beneficiary. A 529’s tax advantages can help you save more for their future education.  

Ready to get started? You can set up an account with The Education Plan® in about 15 minutes and start saving today.