Understanding How 529 Funds Can Be Used for Student Loans
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
What Is a 529 Plan?
Can a 529 Plan Be Used to Pay Off Student Loans?
Common Things to Use 529 Plans For
Tuition and fees Books and supplies Housing Meal plans Computers
Things 529 Plans Can't Be Used 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
Pros and Cons of Using a 529 Plan to Pay Student Loans
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.
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.
Other Ways to Pay Off Your Student Loans
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.
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
About the Author
Share this article: