can a 529 be used to pay student loans

can a 529 be used to pay student loans

Busted: You Can’t Use 529 Money for These 6 College Expenses

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One of the best ways to save for college is by using a 529 plan.

With the help of long-term college savings, you can reduce your need for student loans by covering 529 qualified expenses like tuition, room and board, and some regular student fees.

However, a 529 plan isn’t a free pass for all the things you need to pay for when you attend college. There are some expenses that can’t be covered by using money from your 529.

The whole point of a 529 plan is to provide you with tax advantages when you withdraw money to pay for college expenses. Essentially, distributions are not subject to federal tax. And, they’re generally not subject to state tax when used for qualified higher education expenses by the beneficiary.

However, if the amount distributed is greater than the beneficiary’s adjusted qualified education expenses, taxes may be owed. And, k eep in mind however that all contributions to a 529 plan are not deductible.

What’s more, if you use money in your 529 plan for unqualified expenses, those tax advantages disappear. If you’re misusing 529 money for ineligible expenses, contact a knowledgeable financial expert to determine your options.

And if you need to rollover money from one 529 plan into another or change beneficiaries, you have 60 days to do so. Just make sure you haven’t rolled that person’s account in the prior 12 months.

If you aren’t inside the 60-day rollover period but are still in the same calendar year as the distribution, you could potentially pre-pay some of next year’s 529 qualified expenses with that money instead.

Which college costs don’t qualify as 529 expenses?

Most of us don’t set out to misuse our 529 money. But, it can happen. You can avoid a great deal of unpleasantness by understanding which costs aren’t qualified 529 expenses.

We all need insurance when we go away to school. Car insurance, renters insurance, and other types of insurance can protect your assets.

However, insurance costs aren’t 529 qualified expenses, so watch out. Just because you’re driving your car to school, doesn’t mean you can deduct the cost of insuring it.

Speaking of driving your car to school, none of your transportation costs are 529 eligible expenses.

Whether you’re taking the bus, fueling your car, or getting to campus some other way, you can’t use your 529 distributions to cover the cost of your transport.

It would be great to pay off your student loans a little early, right? Just take some of that money from your 529 and put it towards what you owe.

Sadly, this isn’t an acceptable use of your funds. You aren’t allowed to take money out of a 529 and use it to pay down student loans.

4. Sports and club activity fees

When you enroll in college, there are fees you’ll need to pay. In fact, you might be surprised at how fast student fees add up.

Fees required for enrollment, such as computer lab fees, are usually 529 qualified expenses. However, sports and club activity fees paid as a result of extracurricular activities don’t qualify.

So if you want to join an intramural basketball league, you’ll have to use “regular” money to pay for it.

Where you live can be covered by your 529 money. However, that doesn’t mean that you can use your plan money to trick out your dorm room. Room furnishings aren’t included as qualified 529 expenses.

The same principle applies when it comes to food. You can buy some groceries with your money, but entertainment and dining out aren’t 529 qualified expenses.

6. Exceeding your “cost of attendance”

Every school estimates attendance costs. These costs provide an idea of what you can expect to pay when you attend a specific school.

How much money you can withdraw from your 529 to pay for your living costs are based on the cost of attendance at your chosen school. Therefore, you should do your best to avoid exceeding it.

It’s easy to stay within estimated costs of attendance when you live on campus and buy a meal plan from the cafeteria. But when you live off campus and buy your own food, keep the costs within the cost of attendance at the school.

If you don’t know where to find it, ask the financial aid office for the cost of attendance so you have some guidance.

When you’re using your 529 money to pay for college costs, keep a record of all your purchases. When tax season arrives, you’ll need receipts to back up your claims.

Avoid putting 529 qualified expenses on the same transaction with ineligible costs. If you’re buying groceries for the week, don’t toss shampoo and soap on the same transaction as your food purchases.

While it may seem awkward to divide your purchases and complete two transactions, it could make record-keeping easier. And, you’re less likely to draw the attention of the Internal Revenue Service (IRS) when you prepare your taxes.

Your 529 plan is a great resource for helping you pay for college and reducing your need for student loans. But, it’s not a free-for-all. By planning ahead and knowing which expenses are eligible you can stay within all guidelines listed without issue.

Can a 529 be used to pay student loans

Traveling abroad is exciting, yet few college students get to have this experience, simply because they didn’t know how to make it an affordable and accessible option. While most students want to go abroad and learn while being immersed in another culture, the staggering cost is a huge obstacle to spending time studying abroad and gaining life experience.

Don’t let the cost discourage you- there may be a tax-free way to study abroad and have the adventures and experiences you will remember for life, so keep reading!

529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

A 529 plan is a tax-advantaged savings plan designed to encourage and reward people who save for future college expenses. The 529 plan college-savings accounts programs are also regulated by the Internal Revenue Service. Because 529 plans are specifically designated for higher education, they also provide tax benefits.

Distributions taken from a 529 plan are allocated between principal and earnings on a pro-rata basis, which means that every withdrawal includes an earnings portion. As a result, there are enforced limitations on 529 plan qualified expenses.

The SEC provides that there are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities also sponsor a pre-paid tuition plan.

Because 529 Plans are state-sponsored college savings accounts, the rules determining plan use and fund withdrawal capabilities can vary, so it is of the utmost importance to speak to your 529 plan provider for information on plan withdrawal terms and conditions.

Also, interest rates (the main reason for a 529 plan) significantly vary by fund, so research your options before selecting your funds. You should also budget a monthly contribution to fund your 529 plan.

There are many benefits to participating in your state’s 529 plan. However, with those benefits come restrictions, since qualified withdrawals are strictly limited to specified higher-education expenditures.

When you invest in a 529 account, the savings grow significantly faster than your average savings account. This is the main benefit of a 529 that makes the cost of studying abroad much more manageable than a traditional savings account.

How A 529 Can Be Used To Help College Students Study Abroad

Most (but not all) study-abroad program expenses can be funded through withdrawals from a 529 account. 529 distributions are tax-free if they are used to pay for qualified higher education expenses at a college or university that is eligible for Title IV higher federal education aid.

These higher education institutions will have a federal school code that can be listed on the Free Application for Federal Student Aid (FAFSA). There are more than 100 foreign colleges that are eligible for federal student aid.

You can use 529 plan funds to pay for study abroad expenses if the study program at the foreign institution is eligible for credit at the student’s US home institution, and if the foreign institution is eligible for Title IV federal student aid, which can be determined by looking for the federal school code.

In simple terms, your school has to give credit for the study abroad program, and the foreign college where you will be studying abroad must be eligible for financial aid.

For more details about the types of study abroad programs, compare the reviews sorted by country, program and duration to see how they can benefit your education. By creating a budget and savings plan for your international studies, you will be able to quickly fund your 529 plan and meet your goal.

Learn how to start saving with a 529 plan and watch your account grow.

What Expenses Can a 529 Be Used To Pay When Studying Abroad?

Qualified Expenses for enrollment or attendance at the institution normally fall into one of these three main categories:

1. Tuition, Fees, Books, Supplies, and Equipment

The majority of study-abroad expenses consist of tuition, fees and approved room-and-board expenses, which are eligible to be funded through withdrawals from a 529 plan college-savings account. Required textbooks and supplies (which can get expensive really fast!) are also covered.

Room and board includes the costs of rent (whether living on or off-campus), and food. The expenses must be less than or equal to the room and board allowance from the college’s cost of attendance figures (or the actual amount charged by the school if the student is living on campus) in order to be considered as qualified expenses. Also, the student must have at least half-time enrollment status to qualify, regardless of whether or not they live on campus.

The IRS requires that for room-and-board expenses to qualify for 529 withdrawals, they must be a direct educational expense. If you take a vacation while studying abroad and stay at another location, that room and board expense will not qualify.

3. Computers, Peripheral Equipment, Computer Software, and Internet Access Charges

Previously, the school had to specifically require computers, peripheral equipment, software and Internet access in order to consider these as qualified expenses. With recent changes observing the necessity for technological equipment in education, they are all considered qualified expenses.

What Can A 529 Not Be Used To Pay?

While the definition of a ‘qualified expense’ appears to be all-inclusive, there are many expenses that are not covered as a qualified expense. In fact, many people mistakenly claim some of these expenses only to find that they are not qualified expenses, which can result in unexpected tax penalties.

Travel: Costs to commute to and from school do not qualify. Surprisingly, gas, airfare, and bus fare are all excluded from transportation costs. A word of caution- if you go on weekend trips or spring-break trips not related to educational activities away from your study abroad campus, those expenses will not be covered.

Sports and Activity Fees: Expenses for extracurricular activities such as sports and recreational activities cannot be reimbursed from a 529 account. Interestingly enough, even if the beneficiary has a sports scholarship, the expenses related to sports activities still cannot be paid from a 529 account.

Student loans: A 529 account cannot be use to pay back student loans.

Certain Electronics: While computers and software are now allowed as a qualified expense, other electronics traditionally used for entertainment, such as theater equipment are projectors are not qualified expenses (unless the items are specifically required by the school for enrollment or attendance).

Insurance: Medical expenses and health insurance premium do not qualify. Neither are international healthcare costs or, not unsurprisingly, foreign transaction fees. Such ineligible expenses need to be figured into the overall cost of the trip.

Important Information about the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit — Expenses used to qualify for the AOTC or Lifetime Learning Credit must be excluded from qualified expenses.

Non-qualified withdrawals are subject to income tax as well as a 10 percent penalty on the earnings portion of the withdrawal, which is why it is important to be sure you attend an IRS-eligible educational institution, the expenses qualify, and you are enrolled at minimum as a half time student. There are rare exceptions to withdrawing without penalty, such as veteran’s assistance, attending a U.S. military academy, disability, or death.

First, be sure that the expenses are qualified expenses from an eligible educational institution. Next, make sure that a qualifying person incurred the expenses when the expenses were incurred.

The qualified expenses need to be incurred by the student in connection to attendance or enrollment at a university. While the parent may pay the actual bill, the debt itself must belong to the student.

Withdrawals taken from a 529 plan must also be taken in the same calendar year that the qualified expenses are paid.

If someone else pays your expenses and you reimburse them, you are still able to make a withdrawal from your 529 plan. The withdrawal will generate a 1099 to you as the account owner, and you will need to trace the withdrawal back to the expense.

You Can Use Your 529 To Study Abroad If You Follow The Rules

While most people dream about studying abroad and experiencing life outside of the country, the high price tag associated with tuition and room and board fees prevents most students from applying to study abroad. Fortunately, the 529 plan gives you hope by allowing students save money on qualified expenses, and qualified expenses are the majority of the cost of studying abroad. Do your research to get a clear understanding of how much it will cost so you can work towards your goal.

  • The 529 distribution must be used to pay for qualified higher education expenses.
  • The educational institution must be eligible for at the student’s US home institution.
  • The foreign college must be Title IV federal student aid.
  • The student must at least be enrolled as a half time student.
  • When used properly, the 529 plan alleviates the burden of this expensive (yet worthwhile) experience!
  • Tell us your plans for how you will use your 529 plan to study abroad in the comments below!

When used properly, the 529 plan alleviates the burden of this expensive (yet worthwhile) experience!

Tell us your plans for how you will use your 529 plan to study abroad in the comments below!

Can I Pay Off Student Loans with My 529 Plan?

A new bill that proposes allowing people to pay off student loans with their 529 plans is currently working its way through Congress. That’s good, because student loan debt affects an estimated 43 million Americans. According to the Institute for College Access & Success, seven in 10 members of the class of 2015 left public and nonprofit colleges with student loans. On average borrowers owed just over $30,000.

Finding the money to pay down those loans is often a struggle for many new grads who are just embarking down a career path. Loan forgiveness programs can offer some relief, but only to borrowers who are working in selected fields. (For more, see Student Loan Forgiveness: How Does It Work?)

Why Not Pay Off Student Loans With a 529 Plan?

In January 2017, House members Lynn Jenkins (R-Kan.) and Ron Kind (D-Wis.) introduced H.R. 529, also dubbed the “529 and ABLE Account Improvement Act of 2017.” The bill specifically focuses on 529 plans, which allow you to save for future education expenses on a tax-advantaged basis. Withdrawals from 529 plans are 100% free of federal taxes if they’re used to cover qualified education expenses, such as tuition and fees or room and board.

Federal Reserve data shows that collectively the 108 active 529 plans in operation in 2015 held approximately $258.2 billion in assets. Prepaid tuition plans accounted for $24 billion of that figure; the remainder was held in college savings plans. The bill is primarily designed to encourage employers to contribute funds to 529 plans on behalf of employees via a tax incentive. Up to $100 in employer contributions to these accounts would be excluded from taxes. Small business that make contributions to 529 plans would also get a tax credit to help with the cost of setting up payroll deductions for these accounts.

The legislation would also yield a benefit to savers by removing penalties for using 529 funds to pay off student loans. Currently, taxpayers who use 529 plan money for anything other than qualified education expenses are subject to a 10% federal tax penalty. Besides that, any distribution of earnings is considered taxable income, which could drive the saver's tax liability even higher.

The bill could be a boon for families who may have leftover 529 plan money and want to avoid a tax penalty for making non-qualified distributions. And why not? Currently, the Internal Revenue Service allows for these accounts to be transferred from one beneficiary to another, but if there are no other students who can use the money, the account owner is faced with letting it sit or accepting the tax bite. How fair is that? (For more, see 5 Secrets You Didn’t Know About a 529 Plan.)

One thing that the bill doesn’t address is how distributions from 529 plans to pay student loans would be treated in terms of the student loan interest deduction. The tax code prohibits double-dipping when it comes to claiming multiple credits or deductions for the same education expenses in a single year. If the bill becomes law, there may be a question about whether 529 plan owners would be able to use those tax-advantaged funds to pay student loans and still claim a deduction for the interest paid.

H.R. 529 is still working its way through Congress, and it remains to be seen what final form it will take if it becomes law. In the meantime parents can continue funneling money into 529 accounts on behalf of qualifying beneficiaries. For 2017 married couples can contribute up to $28,000 per child to a 529 without triggering the federal gift tax.

Students who are dealing with education debt remain limited to exploring existing avenues for making their loans more manageable. Consolidation, refinancing or pursuing an income-based repayment plan are all options, but borrowers should consider each of them carefully. Student Loans: Real-Life Ways to Ditch Your Debt can help you choose the best approach for now.

How to Pay Student Loans or Contribute to 529 Plans and Earn Miles and Points

There is a fantastic new way to give the gift of education to any friend or family member. And, it’s even a method to help you pay down your student loan while earning miles and points. Gift of College is a college savings registry of sorts.

You can purchase gift cards from the company that the recipient (or you) can use to pay off a student loan, or establish or contribute to his or her existing 529 plan. For miles and points enthusiasts, it finally paves the way to earn valuable loyalty currency just for paying off your loan or helping someone else afford college. Let’s look at how the program works.

Have you ever been gift shopping for a friend or family member and wanted to give them something more meaningful than the latest electronic gadget, game or book? This may be especially true when it comes to little kids. Do they really need one more toy, or would a more meaningful and thoughtful gesture be a few dollars to help him or her plan for a college education one day? Of course, being a miles and points junkie, you really don’t like to buy any gift without having a way to earn some miles and/or points from the purchase.

Similarly, parents might love to have family members contribute to their children’s college funds, but there was no ideal way to do so in the past. Enter Gifts of College. With the company’s new gift cards, you can contribute to a 529 plan (new or existing), or even pay off an existing student loan for someone who’s already graduated.

What’s the best part about buying a Gift of College gift card? If you do so with a rewards credit card or debit card, you’ll earn some valuable miles and points for yourself. It’s a win-win.

First Things First, What is a 529 Plan?

A 529 plan is a type of college savings plan that offers certain tax advantages. According to CollegeSavings.org, “Savings in a 529 plan grow free from federal income tax, and withdrawals remain tax-free when used for qualified higher education expenses. Additionally, many states mirror the federal 529 plan tax advantages by offering state tax-deferred growth and tax-free withdrawals for qualified higher education expenses.” Talk with your accountant to find out if a 529 plan is right for your situation.

Where Can You Buy GiftofCollege.com Gift Cards?

These gift cards are relatively new so you won’t find them everywhere just yet. Look for them at Toys R Us and Babies R Us stores. Not all locations sell them but, it’s worth it to take a look at your local store first. If you can’t find the gift cards near you, order them online at GiftofCollege.com.

What Gift Card Denominations are Available?

For in-store purchases, you can select the amount of the gift card in any denomination between $25 and $500. To get the best bang for your buck, load the maximum of $500 on the card and the fee will be 1.19 percent. If you purchase your gift card online, you can only load up to $200 on one card so that makes the fee closer to three percent (or $5.95).

How are GiftofCollege.com Gift Cards Delivered?

If you purchase a gift card at the company’s website, you can opt to have it delivered via email or you can have a physical gift card mailed to your recipient. (USPS First Class shipments cost $1.95 for one card and Express Service is $9.95.)

Which Credit Card Should You Use for the Purchase?

Determining which credit card to use for Gift of College purchases is a personal choice, but here are some tips:

  • Do you have a new credit card that you’re trying to hit the minimum spend in order to receive a big point of miles or points? If so, use that card.
  • Do you have a cash back card with an earning percentage of 1.9 or greater? Use that card.
  • Do you have a card that rewards you for charitable spending? Use that card since Gift of College online orders are often coded as charitable donations.
  • Otherwise, use your favorite rewards card for any Gift of College purchases.

How Does the Recipient Redeem the Gift Card?

Once your friend or family receives your gift, he or she will need to:

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