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Use 529 Savings for Pre-College Schooling, Student Loans, and Apprenticeships

Jan 08, 2020

In the 1990s, Congress passed legislation to create 529 college savings programs to help families create a nest egg for college. With terrific tax benefits and lots of flexibility to move money among beneficiaries, more than 13 million current account holders have saved more than $325 billion.  

In recent years, Congress has twice used year-end legislation to expand the definition of “qualified educational expense” to permit 529 account holders to use their hard-earned savings for more than college tuition and associated costs.  

In December 2017, Congress passed the Tax Cuts and Jobs Act. The Act included a provision to permit 529 account holders to withdraw up to $10,000 per year to pay for tuition expenses at elementary and secondary private and parochial schools.   

In December 2019, Congress again expanded the permitted use of 529 savings. This time, Congress tucked two critical provisions into a mega $1.4 trillion year-end government funding bill. Money invested in 529 savings programs can now be used to make payments on student loans and also to pay for the costs of approved apprenticeship programs.  

  • Student Loans: With the $1.6 trillion mound of student debt increasing every year, Congress expanded the definition of Qualified Education Expenses to include the repayment of student loans. 529 plan account holders may now withdraw up to $10,000 tax-free to make principal and interest payments on student loans. Although the $10,000 benefit is a lifetime benefit, it can be used for the beneficiary of the plan and their siblings (brother, sister, stepbrother and stepsister).  
  • Apprenticeship Programs: As the value of well-constructed apprenticeship programs increases, there is the recognition that college is not for everyone and attractive career alternatives exist in the trades and elsewhere.  In December 2019, Congress made a significant policy change to permit 529 plan savings to be used to pay for apprenticeship programs listed under Section 1 of the National Apprenticeships Act. Check out this site to learn more about registered apprenticeship programs.  

Here is some fine print and a few tips to take advantage of these critical policy changes.  

  • No double-dipping on student loan interest. 529 account holders who make withdrawals to pay student loan interest cannot also claim a student loan interest deduction on their taxes.  
  • The permitted $10,000 withdrawal from 529 plans for student loans is a lifetime aggregate cap per beneficiary, but these savings can be used to pay-off up to $10,000 of student loans for multiple beneficiaries. 
  • Now that 529 plans can be used to pay off student loans, contributing to the plans while a student is still in college makes more sense – particularly if tax-advantaged earnings and gains on the 529 savings turn out to be greater than the interest rate on the loan.  
  • Distributions from grandparent-owned 529 plans are considered untaxed income to students on the FAFSA financial aid form and can result in a reduction in a student’s financial aid package. For this reason, grandparents have been advised to wait until after January 1 of their grandchild’s sophomore year of college to make distributions and avoid this negative effect on a student’s financial aid. The new change increases the value of grandparent-owned 529 plans because students can now use those savings after graduation to pay-down student loans.  

The new provisions make already favorable 529 savings plans even better to save for education: elementary, secondary, post-secondary, and, now, apprenticeships and to pay off student loans. The best advice is to start saving as early as possible, evaluate the pros and cons of each saving option, and plan ahead to make college affordable for your family.