Can 529 Funds Be Used on Student Loans?

Due to the high cost of college, saving enough for school can seem impossible. Fortunately, the right investment vehicle can simplify the process, as your investments could grow over time.  One of the best options for setting aside money for college is a 529 plan. This tax-advantaged savings vehicle lets you invest post-tax money in […]

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Due to the high cost of college, saving enough for school can seem impossible. Fortunately, the right investment vehicle can simplify the process, as your investments could grow over time. 

One of the best options for setting aside money for college is a 529 plan. This tax-advantaged savings vehicle lets you invest post-tax money in mutual funds or ETFs and make tax-free withdrawals for qualifying expenses, including certain college expenses. 

While 529s are often used for college, you can also use the money you invest in a 529 for K-12 tuition, apprenticeships, and even student loans. Here’s what to know about using leftover 529 funds for student loans. 

Can a 529 be used for student loans? 

Ideally, you’d use all the funds in your 529 for college costs, but sometimes this doesn’t happen. For instance, you might graduate earlier than expected and have leftover money. Fortunately, recent legislation expanded how you can use these leftover funds. 

The SECURE Act 

In 2019, the U.S. Congress enacted the Setting Every Community UP for Retirement Enhancement (SECURE) Act to incentivize employers to offer retirement plans and encourage employees to participate in those plans. 

But its provisions also expanded how 529 funds could be used. Under the SECURE Act:

• Up to $10,000 of leftover 529 funds can be used to repay the beneficiary’s or their siblings’ qualified student loan principal and interest. Siblings include brothers, sisters, stepbrothers, and stepsisters. 
• Qualified student loans include federal loans and many private loans. 
• To be eligible, loan funds must be used solely for education—mixed-use loans aren’t eligible. Private student loans used at non-Title IV colleges or universities also aren’t eligible.
• Certain states may also have rules in place about how 529 funds can be used, so it’s important to research your state’s rules around qualified distributions. 

When you could use a 529 to pay off student loans

Here are some instances where you could potentially take a qualified tax-free distribution from a 529 to pay off student loans. 

Scenario	Can you use a 529 to pay off student loans?
A student graduated after 3 years instead of 4
You want to use one sibling’s leftover 529 funds to pay another sibling’s student loans
A parent borrowed money to pay for their child’s education (e.g., Parent PLUS Loans)
The loans are from an education obtained in a country outside the U.S.	Sometimes
The student used the loans to attend a for-profit college	Sometimes
The student took out loans but didn’t graduate

Can you use a 529 on student loans if a student graduated after 3 years instead of 4?

Graduating in four years is typical, but sometimes, a 529 beneficiary might graduate early. If you graduate in three years instead of four, you can use up to $10,000 in remaining 529 funds to repay eligible student loans. 

Can you use 529 funds for student loans if you want to use one sibling’s unused 529 funds to pay their sibling’s student loans?

Likewise, if a 529 beneficiary has unused funds upon graduation—due to graduating early or another reason—those funds can also be used to repay a sibling’s eligible student loans. Each sibling could get up to $10,000 in leftover 529 funds for this purpose. 

Can you use 529 plan funds to pay off Parent PLUS Loans or other student loans a parent took out to help their child?

If your parents took out loans to help you pay for school, you can use up to $10,000 in 529 plan funds to repay Parent PLUS and other qualifying loans, but there’s an important caveat—the parent must be the designated beneficiary of the 529 to use the funds for this purpose.

Can you use a 529 to pay student loans if the loans are from an education obtained in a country outside the U.S.?

Suppose you study abroad for a semester or pursue a degree at an international university. In this case, you may also be able to use your 529 to repay up to $10,000 in student loans, but again, there’s an important caveat. 

To be eligible, your college or university must be a Title IV school. View the U.S. Department of Education’s list of participating international schools for more information.  

Will a 529 plan cover student loans used to attend a for-profit college?

Unused 529 funds can also be applied toward up to $10,000 in student loans for for-profit colleges, but again, these schools must be Title IV institutions. If you took out private loans to pay for tuition or room and board at a non-Title IV college, those costs won’t be considered a qualifying expense. 

Can you use a 529 plan for student loans if the student took out loans but didn’t graduate?

In some cases, a 529 beneficiary might not graduate college at all. Maybe college wasn’t the right path, and you pursued full-time employment instead. Any unused 529 funds can be used to pay off up to $10,000 in qualifying federal or private student loans if this happens.  

Ask the expert

Chloe Moore

CFP®

This strategy could work well when necessary college costs cannot be paid from a 529 plan. In this case, the student can take out a loan to pay for any non-qualified expenses, then use a 529 plan distribution to repay up to $10,000 of the student loan balance.

How might 529 plans differ by state regarding student loans? 

While the SECURE Act is federal, not all states follow its provisions around qualified and non-qualified 529 college savings plan distributions. It’s possible your state may not view a 529 distribution for student loan repayment as qualified. 

For instance, California didn’t conform to the SECURE Act’s student loan provision until October 2021.

It’s also possible state taxes may apply to any gains you withdraw. For this reason, it’s essential to research your state plan’s rules before assuming you can use leftover 529 funds to repay a portion of your student loans. 

What if I use more than $10,000 from a 529 plan to repay student loans? 

The SECURE Act applies an aggregate limit of $10,000 for qualified student loan repayment from a 529. 

If you use more than that amount to repay your student loans, you’ll pay ordinary income taxes on the amount of gains withdrawn, and a 10% tax penalty for a non-qualified 529 distribution will likely apply. 

Suppose you withdraw $10,000 from your 529 initially for student loan repayment, then make another $8,000 withdrawal for the same purpose. In this case, the initial $10,000 distribution may not be taxable, but you will pay ordinary income taxes on a portion of the $8,000, plus a 10% tax penalty.   

The IRS requires that you report taxable 529 distributions on your taxes, and failing to do so could mean additional fees and penalties beyond what applies for a non-qualified distribution. 

Does using a 529 plan for loan repayment affect future financial aid eligibility?

Making a 529 withdrawal for qualified student loan repayment can be a great way to use any leftover 529 funds. And if you decide to head back to school in the future, this repayment action shouldn’t affect your financial aid eligibility. 

But if funds remain in your 529 plan, it could affect your future financial aid. Student-owned assets can reduce the amount of financial aid you receive by up to 20% of the asset’s value. 

Can I use a 529 plan to pay for multiple people’s student loans? 

Funds in a 529 can only be used to repay student loans for a beneficiary or their siblings. That said, it’s possible to change the beneficiary on a 529 plan and use any remaining funds to pay off multiple people’s student loans. 

For instance, you might designate yourself as a beneficiary once your children have graduated college. In this case, you could use up to $10,000 in remaining 529 funds to repay a qualified education loan, such as a Parent PLUS loan. 

What can you use a 529 plan for after graduation? 

If you have significant funds left in a 529 plan after graduation, you can only use up to $10,000 for qualified student loan repayment for a beneficiary and their siblings. Fortunately, it’s possible to use the funds for other purposes, too, including the following:

• Future education of the current beneficiary.
• College tuition, fees, and room and board for a sibling.
• Non-qualified withdrawal, though taxes and a 10% penalty will apply.
• College tuition, fees, and room and board for a grandchild.
• Rollover into a Roth IRA (up to $35,000, certain requirements must be met.) 

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