Understanding How 529 Funds Can Be Used for Student Loans

Q: Can I use my 529 plan to pay my student loans?

Thanks to the 2019 SECURE Act, you can now use a 529 plan to pay student loans. Specifically, you can use up to $10,000 in 529 plan funds per beneficiary toward student loan repayment.

Q: What can a 529 not be used for?

A 529 plan cannot be used for non-qualified education expenses, such as college application fees, transportation, or extracurricular activities.

Q: What can 529 education funds be used for?

529 education funds can be used for qualified education expenses, such as tuition, fees, room, board, books, and supplies. You can also use up to $10,000 per year for private K-12 tuition, as well as $10,000 per beneficiary on student loan repayment.

Can a 529 Be Used to Pay Off Student Loans?

Rebecca SafierUpdated January 30, 2023

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A 529 plan is an investment account that’s mainly used to pay for college and other educational expenses. You can also use 529 plan funds to pay off student loans, thanks to a law that was signed in 2019. More specifically, you’re allowed to use up to $10,000 per beneficiary on student loan repayment. Read on to learn more about 529 plans and what you can (and can’t) spend 529 savings on.

What Is a 529 Plan?

A 529 plan is a tax-advantaged investment account that was created in the 1990s to help people save for college. Parents often open 529 savings plans on behalf of their children to save for their postsecondary education expenses. There are two types of 529 plans: savings plans and prepaid tuition plans. Savings plans allow you to make tax-free investments and withdrawals, as long as you’re using the money to pay for qualified educational expenses. 529 savings plans work like a Roth IRA, since you submit after-tax dollars and invest them in mutual funds or similar investments. Your savings may increase or decrease depending on the performance of your investments. Prepaid tuition plans, on the other hand, let you prepay tuition at participating public colleges at today’s rates. You won’t have to pay more in the future, even if tuition increases by the time your child attends. Every state offers its own 529 plan, but you’re not limited to the plan offered by your state of residence. You can choose another state’s plan if you prefer it. That said, opting for your own state’s plan could make you eligible for certain tax deductions or credits.

Can a 529 Plan Be Used to Pay Off Student Loans?

Although 529 plans are primarily used for college expenses, they can now also be used to pay off a certain amount of student loan debt. Thanks to the 2019 SECURE Act, 529 plan owners are now allowed to use their funds to pay off up to $10,000 in student loans for the account’s beneficiary. That $10,000 limit applies to each beneficiary, not each account. If you have remaining funds in the account, for instance, you could change the beneficiary to the student’s sibling to help them pay off student loans. Parents with PLUS loans could also make themselves the beneficiary and put $10,000 toward their own loans.

Common Things to Use 529 Plans For

Besides paying student loans, you must use 529 plan funds on qualified educational expenses. If you withdraw the money for non-qualified expenses, you could be subject to income taxes and a penalty. Here are some common expenses to use 529 funds on:

Tuition and fees
Books and supplies
Housing
Meal plans
Computers

As part of the Tax Cuts and Jobs Act of 2017, 529 plan owners can also use 529 funds to pay for private school tuition for kindergarten through 12th grade. The maximum you can use on K-12 tuition is $10,000 per year. Recommended: Student Loan Uses: What Can Student Loans Be Used For?

Things 529 Plans Can't Be Used For

You might have some additional school expenses that don’t count as qualified education expenses. Here are some things you can’t use 529 plan funds for:

College application fees
Testing fees, such as the SAT or ACT
Transportation
Health insurance, unless the fee is an official requirement for enrollment and attendance
Extracurricular activities, such as sports and clubs
Dues for fraternities and sororities
Room and board costs that exceed the school’s official cost of attendance

If you use 529 plan funds on non-qualified expenses, you’ll have to pay income taxes and a 10% penalty.

Pros and Cons of Using a 529 Plan to Pay Student Loans

Now that you know the answer to the question “can a 529 be used to pay student loans?” is yes, let’s talk about what that means. If you’d like to use a 529 to pay student loans, there are both benefits and drawbacks to consider. Here are some pros and cons to keep in mind before you move forward with this strategy.

Pros

Tax benefits: Your 529 savings can grow tax-free, as long as you spend the funds on qualified expenses. Some states also offer tax deductions or credits on your 529 contributions, leading to additional savings.
Option to change beneficiaries: You can change the beneficiary on your 529 plan account, allowing you to withdraw up to $10,000 for the primary student, their siblings, or even yourself to use toward student loans.
Flexibility: You can contribute to or take distributions from a 529 plan at any age, meaning you could contribute to an account even after a student has graduated from college and use the funds toward student loans.

Cons

Limit of $10,000 per beneficiary: The maximum amount of 529 funds you can use toward student loan repayment per beneficiary is $10,000, which may be only a small portion of a borrower’s total student loan debt.
May make you ineligible for the student loan interest tax deduction: Since the 529 plan already comes with tax benefits, the IRS doesn’t let you simultaneously claim the $2,500 student loan interest tax deduction when you use a 529 plan to make student loan payments.

Pros	Cons
529 savings can grow tax-free.	Limit of $10,000 per beneficiary for student loan repayment
Option to change beneficiaries on the account to pay off student loans.	May make you ineligible for the student loan interest tax deduction
You can continue to contribute to or take money from a 529 even after a student graduates to pay off student loans.

Other Ways to Pay Off Your Student Loans

Even if you use a 529 plan to pay off $10,000 of your student loans, you might have additional debt left over. Here are some strategies to help you pay it off:

Explore your repayment plan options. Federal student loans are eligible for a variety of repayment plans, including graduated repayment and income-driven repayment. If you need to reduce your monthly bills, consider applying for one of these plans.
Set up biweekly payments. Instead of paying your loan payments once a month, pay half the monthly payment every two weeks. This strategy adds up to an additional one month’s payment per year. This extra payment could cut down on interest charges and reduce how long it takes to pay off student loans.
Pursue student loan forgiveness. There are various forgiveness and loan repayment assistance programs that will forgive part or all of your debt in exchange for qualifying service. Some companies also offer student loan assistance benefits to employees. Learn more about employer student loan repayment opportunities, plus other options so that your student loans are forgiven.
Look into refinancing your student loans. If you owe high-interest loans, it could be worth refinancing your student loans for better rates and new repayment terms. Just be careful about refinancing federal loans with a private lender, as doing so means forfeiting access to federal protections.

Finally, if you can afford to pay your loans off ahead of schedule, consider making extra payments toward your principal amount. Use a student loan calculator to see how much you’d need to pay to shave a year or two off your repayment timeline and how much interest you could save. By getting rid of your debt early, you could shift your focus to other financial priorities.

The Takeaway

Nearly 43 million Americans owe $1.745 trillion in student loans, with the average student loan debt adding up to $37,787 in federal loans per borrower, according to the Education Data Initiative. Using a 529 plan to make student loan payments can be a savvy financial move, since your contributions and withdrawals will be tax-free as long as you don’t spend more than $10,000 per beneficiary. At the same time, using savings from a 529 plan on student loans means you can’t simultaneously claim the student loan interest tax deduction. Given the tax implications, it could be worth speaking with a financial advisor to determine the best move for your specific situation.

3 Student Loan Tips

Refinancing your student loan can lower your monthly payments and help you adjust your loan term. Compare student loan refinancing rates to find a loan that works for you.
Paying extra each month on your student loan can reduce the interest you pay and so lower your total loan cost over time. (The law prohibits prepayment penalties on federal or private student loans.)
One pain-free way to pay down your student loan sooner: send in your tax refund to put against the principal balance. Since it’s money that has already been taken out of your pay, you won’t miss it.

Frequently Asked Questions

Can I use my 529 plan to pay my student loans?

What can a 529 not be used for?

What can 529 education funds be used for?

Photo credit: iStock/AntonioSolano

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About the Author

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).

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