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If you have a 529 programme and recently graduated, you can use the funds from your 529 to pay pupil loans. ( Shutterstock )

Educatee loan debt affects a large portion of college students — 55% of 18- to 29-year-olds who graduate with a bachelor's degree carry some grade of student loan debt, with the boilerplate amount ranging from $20,000 to $24,999 in 2020, according to Federal Reserve data.

If you lot're finding information technology hard to make your student loan payments after yous graduate, there'south some good news: The IRS at present allows 529 plan holders to use those funds to pay for student loans. Keep reading to learn how to pay student loan debt with a 529 plan and some ways you can employ any leftover 529 money.

Refinancing tin also be a way to make educatee loan repayment more manageable. Visit Credible to learn about student loan refinancing and see your prequalified rates.

  • What is a 529 plan?
  • Can y'all use a 529 plan for student loans?
  • How to use a 529 programme for educatee loans
  • Uses for leftover 529 money
  • Consider refinancing to relieve money on your student loans

What is a 529 plan?

A 529 program, also chosen a qualified tuition programme, is a type of revenue enhancement-free savings account meant to help pay for qualifying education expenses. States, state agencies, and educational institutions tin can sponsor these plans, which come up with tax benefits. The idea is that the account owner tin can help abound savings for their beneficiary to use for their future education, whether it'due south for themselves, a child, grandchild, or spouse.

Two types of 529 plans are available:

  • Prepaid tuition plans — These plans offer plan holders the ability to purchase units or credits toward participating educational institutions for futurity tuition and mandatory fees. These plans allow you to save money on tuition by paying today's prices before they go up when the casher is gear up to go to college. Yous typically tin can't use this type of programme to pay for hereafter room and board at a college or university, or to prepay for elementary or secondary school tuition.
  • Education savings plans — Account holders tin can open an investment account specifically to save for a beneficiary's time to come qualified educational expenses. You can use the money invested for whatsoever qualifying educational expenses — tuition, fees, and room and board.

Ane of the main benefits of a 529 program is that withdrawals are more often than not exempt from federal income revenue enhancement, and often land taxes, as long every bit yous use the money for qualifying educational expenses.

What is the SECURE Act?

The Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, enacted in 2019, changes how 529 plan holders can utilize funds toward new qualifying expenses — including educatee loan payments (more on that below).

Account holders can too use 529 funds to pay for expenses toward qualifying apprenticeship programs that the beneficiary attends, such as equipment, books, fees, and other supplies related to the apprenticeship.

The SECURE Act allows business relationship holders to withdraw money for these purposes retroactively to Jan. 1, 2019.

With Credible, you can compare student loan refinance rates from diverse lenders, and it won't affect your credit.

Can you lot use a 529 programme for student loans?

Yes, you tin can use a 529 programme to pay for qualified pupil loans.

The SECURE Act allows account holders to use a lifetime limit of $10,000 per casher to pay downwardly pupil loans taxation-free from their 529 plan — both federal student loans and most private ones.

And so if you take multiple children, you can use up to $x,000 each for a kid and their sibling toward their student loans — up to $20,000 total.

Prior to the SECURE Act, withdrawals for student loan payments didn't count as qualifying educational expenses. That means if you lot used your 529 plan for this purpose, you were bailiwick to a federal tax penalty of x%. Plus, any earnings distributions counted as taxable income, which could have increased your tax liability.

How to use a 529 program for student loans

If you lot desire to use your 529 program to pay for student loans, have these steps:

  • Decide how much you want to pay. You can utilise up to $10,000 per beneficiary. To decide how much you want to withdraw, consider the current balance of the student loans you want to pay.
  • Check whether your state considers student loans as a qualifying expense. Just because the federal government has expanded the definition of qualifying educational expenses to include pupil loans, doesn't hateful your state has. Before making a withdrawal, contact your country to meet whether its definition of qualifying educational expenses aligns with the federal definitions. If your 529 program is from a unlike land than the one you live in, it's also helpful to contact the country that holds your program to see what its laws are and how information technology might bear on your withdrawal.
  • Make the withdrawal and apply it toward student loans. Once y'all've adamant yous can use 529 withdrawals toward student loan payments, follow the plan holder's instructions for making a withdrawal. So, pay the distribution toward the student loans — you lot'll need to do this within the same agenda year you fabricated the withdrawal. Make sure to go on proof y'all made withdrawals and ensure it matches up with the student loan payments.

Uses for leftover 529 coin

Sometimes, families can have leftover money in their 529 plan. If this is the example, you tin can employ any remaining coin for another kid's college expenses.

Many plans permit you to alter the casher's name, so if y'all take another relative, y'all may want to consider putting the 529 programme in their name. In that location'southward nothing wrong with leaving the funds untouched until you know what y'all plan on doing with the money, or even waiting until after a bull market is over before using the remaining funds.

Consider refinancing to salve money on your educatee loans

Student loan refinancing is another way to save money on student loans, especially if you can get a lower involvement rate. If you extend your repayment term, you'll likely terminate up with a smaller monthly payment (just y'all'll also cease up paying more interest over the life of the loan).

If you have federal educatee loans, remember carefully before yous refinance. Refinancing them into a private loan means you lot'll lose access to federal benefits and protections, like income-driven repayment plans and student loan forgiveness programs.

That being said, the savings from refinancing your loans could be worth it in some cases. It's a good thought to shop around and compare multiple lenders and then that you tin can find the best student loan refinance for your situation.

If you're gear up to refinance, Credible easily lets you compare student loan refinance rates from various lenders in minutes.