It is possible to use the 529 college savings plan, for study loan repayment. However, there are some requirements and keys to take into account. Let`s learn more about how to give the money back with a 529 plan.
First of all, it is very important to know that the 529 plan, can be used for the payment of the study loan, thanks to The SECURE law modification. This modification allowed the change about the concept of the 529 plan qualified distribution which can be used to repay education loans for both of them: The beneficiary and his/her siblings.
It is very important to understand as well, that the 529 plan can be used for partial o full repayment of the loan. Therefore repayment models can both be accepted equally.
What is a 529 College Savings Plan?
The 529 plan is a type of investment account that offers tax advantages. Through one of these plans, you can save and create a fund that can be only used for qualified higher education expenses.
Through these plans, savings, at the federal level, and qualified withdrawals are tax-free. In addition, in a particular way, States may offer full o partial tax deductions for the contributions people make for this State or any other.
Anyway, the State tax benefits will depend on the place you live and on the 529 plan is settled.
We could use a 529 plan to cover more than some college expenses. For example, The IRS accepts up to $10,000of from a 529 plan for paying tuition fees at public, private, or religious schools and for the beneficiary´s K12. However, we depend on our place and State of residence again.
What is the limit for a 529 Plan applied to a student loan?
The limit is up to $10,000. The beneficiary can use this money all along with his/her life. This person could have one o more than one 529 plan. This does not mean He or She would apply for a $20,000 loan, the limit, as I say you before, is $10,000. For that reason, having more than one 529 plan does not allow you to do a higher amortization either.
You can also combine two o more 529 plans but you have to know that the limit is always $10,000. For example, the 529 plans of two siblings could be combined to repay the loan of one of them, but you can never exceed the amount of $10,000.
On the other hand, the $10,000 limit is for each beneficiary not for each plan. Once the limit is exceeded it can not be applied for further repayments. What we could do is to use another person´s name to get the finance as long as the $10,000 limit has not been exceeded.
Taking everything into account, we can say that the repayment limit is for each per-borrower, who applies to all education loans.
Wich loans can be funded through a 529 Plan?
Not all loans can be funded through a 529 plan because some requirements are needed.
According to the law, it must be a qualified loan. Qualified means federal and private student loans.
Requirements for a qualified loan
- Money has to be used for paying the qualified higher education expenses exclusively. This does not include mixed loans such as a credit card or house loan.
- Neither loans combined with financial aid nor other study loans that pass the limit are accepted
- A retirement plan is not a qualified loan.
- Loans from other people (parents, friends, siblings, descendants, etc) are not qualified.
- The loan application form has to be made within 90 days after the payment date. Allways for the college expenses (no prior year expenses can be elected)
- The loan´s beneficiary has to be enrolled (at least part-time) during the financial academic period. Because of this, loans for residence and relocation after graduation are not eligible.
- Continuity education and dual enrollment loans are not eligible
- Loans are for students enrolled in colleges and universities that can be chosen for receiving Federal aid but only for those who have the IV certificate.
Is it possible to apply for the 529 Plan all over the United States?
Not all States adjust the federal rules over the qualified expenses. According to a geographical location, a loan may or not be considered qualified by the State where is applied for.
This may even occur when the IRS considers that the use of the 529 plan is qualified.