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March 09, 2020 | Posted in:

New Option to Reduce Student Loan Debt

Deep inside the SECURE Act is a provision that broadens the acceptable use of 529 plans.

These are plans available to set aside after-tax money to pay for college and K through 12 education expenses. As long as the funds are used to pay for qualified expenses, any earnings or interest in the plan is tax free. Any unused earnings are subject to a penalty and income tax.

The new rule

Leftover money in a 529 plan may now be used to pay off student loans without generating income tax. There is a $10,000 lifetime limit for the plan’s beneficiary and each of their siblings. For example, parents with 4 children can take $40,000 from the 529 and pay off $10,000 for each of their kids’ student loans.

One great way to take advantage of the new rule is to pay off your student’s loan as a graduation gift. If your student has access to low-interest loans, they may want to take one out just in case your 529 funds aren’t enough to cover all four years of college. When there is 529 money left over, you can use it to reduce your student’s loan balances. What a graduation gift!

Given the recent changes, it makes a lot of sense to explore your options and develop a plan now for the best use of funds in your 529 accounts.

 

 

This article was published in Alloy Silverstein’s Spring 2020 Newsletter. Click here for more content or to subscribe.

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