student loan debt
Hello Terry,
Wednesday, July 29 on WGN radio, I asked you the following questions.
1. My daughter has now graduated from her master’s program University of Cincinnati.
2. I now want to pay-off her student loans. My daughter is my beneficiary of a good 529 student plan.
3. I’m the owner, she is my beneficiary.
Questions: I want a very good Audit trail of receiving the monies from her 529 plan and then sending these monies to the student loan services provider, to pay-off the loan completely.
I will ask the 529 plan to send me a check and ask the following information to be added to the check stub: monies sent from my daughter’s 529 plan to me. This will include th plan number and my daughter’s name.
Then when I send the pay-off monies to the student provider, I will send a check noting these monies came from my daughter 529 plan. I will detail this in a remittance letter and ask the provider to document this payoff and return their signoff payment.
Is this a good way to have and Audit trail?
Can you suggest a better way for me?
Thanks
Terry Says
Wait — the reason I didn’t answer on the air on Weds was I was sure there are some limitations on using the 529 plan to pay down existing student loans. And when I looked, there are definitely restrictions. Please read this:
https://www.savingforcollege.com/article/can-you-use-a-529-plan-to-pay-off-student-loans
I talked with the author, Mark Kantrowicz, and he said the $10,000 limit is still in effect, even though the article was written several years ago. See details below.
The SECURE Act of 2019 expanded 529 plan qualified expenses to include student loan repayments. This means you can withdraw money from a 529 account to pay down both principal and interest on qualified education loans without incurring the usual 10% penalty or federal income tax on earnings.
Lifetime Limit: Each beneficiary can receive up to $10,000 total from all 529 plans combined for student loan repayment. This is a lifetime limit, not an annual limit.
Sibling Provision: You can also use up to $10,000 per sibling of the beneficiary. Siblings include brothers, sisters, stepbrothers, and stepsisters. You can change the 529 plan beneficiary to a sibling to access this additional limit.
Qualified Loans: Both federal and most private student loans qualify, as long as the loan was taken out to pay for higher education expenses.
Tax Considerations
Federal Taxes: Withdrawals for student loan repayment are federal-tax-free up to the $10,000 limit per borrower’
State Taxes: Some states may tax the distribution or recapture state tax benefits, so it’s important to check your state’s rules.
Interest Deduction: Any student loan interest paid with 529 funds cannot be claimed for the student loan interest deduction.
Plan Beneficiary Changes: If you want to use leftover 529 funds for a sibling or parent’s education loans, you can change the account beneficiary without tax consequences
Avoid Overfunding Issues: The $10,000 limit applies across all 529 plans for the same beneficiary. Multiple accounts do not increase the limit.
I know you asked specifically HOW the money should be withdrawn and paid, and couldn’t find details on that process. But I suggest you withdraw the $10,000 in one lump sum from the plan — and then immediately pay off that much of the student loan balance, keeping good records of the transaction.
