Now that the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was passed on Dec. 20, many individuals are revisiting the pros and cons of using 529 plans to repay student loans.
Signed into law on Dec. 20, the act is heralded as “the most significant piece of retirement legislation introduced in over a decade.” One of the major elements of the bill is allowing individuals the ability to use up to $10,000 in 529 plans to repay student loans. 529 plans are college savings plans with built-in tax advantages, most notably, that earnings in the plan will not be taxed if used for qualified educational expenses.
Colleen Krumwiede, co-founder and CRO of Quatromoney, a revolutionary new platform designed to help families make all four years of college costs more manageable in advance, said there are pros and cons of using 529 plans to repay student loans.
Pros and cons include:
- Grow federal tax free and withdrawal
- Many states offer state tax deductions or credits
- Ability to reassign to other direct relatives without penalty, including yourself
- Up to $10,000 in interest and principal repayment over lifetime
- Before college, 529 plans should be focused on savings not future educational debt.
- If you use your kid's existing account to reassign benefit to you to pay down your existing debt, this will mean less savings for your kid.
- 529 plans typically use a mutual fund approach, so if you like to be more hands-on with your investments, this may not be for you.
- Most 529 plan have management fees (similar to other investment vehicles).
CNBC urges taxpayers to verify statutes at the state level. “While the federal government has blessed using your 529 plan to repay student loans, the question is now whether states will follow their lead. Some states have limited allowable uses of 529 plans to ‘qualified higher education expenses,’ including tuition, fees, textbooks and supplies at a post-secondary school.”
Sharon Epperson, senior personal finance correspondent for CNBC, acknowledged that setting aside funds for college can make many parents and/or individuals feel overwhelmed. “If you look at putting in just $10 a week over the lifetime for your child, by the time they’re 18, they’ll have over $15,000 in that 529 plan. Now, how many people start at birth? They’ll say, you know, we’re about to send them to college now, so what can I do? And so, that’s when you have to come up with some creative ways to look at different scholarship opportunities.”
But, for those want to make the most of their 529 plans, Krumwiede said they have options. “When you ask your 529 plan provider for a withdrawal, ask that withdrawals be made out directly to the student loan lender or servicer,” Krumwiede shared. “Direct payments make it easy to track that the 529 plans were spent for authorized use tax-free. If you choose the check to you or your kid option, remember that you will need to document how the funds paid down student loan debt. You have to spend the 529 withdrawal in the same calendar year that it was taken out.”
Krumwiede also said Quatromoney can also assist individuals who are questioning whether using 529 plans is right for them. “We can help you think about the timing of using this option. Consider using existing 529 plans to pay four years of college costs first. In fact, use them all up,” Krumwiede said. “If a parent or other relative wants to continue to help after graduation, then the 529 plan can be great to grow and withdraw funds to help pay down your kid's student loans.”
Natasha Zena is co-founder of GetLioness.News, the go-to news source for everything female entrepreneur.