529 savings and student debt

The bottom line of qualified distributions in regard to using 529 funds to pay off student loan debt is limited to $10,000 per borrower within any given individual’s lifetime. Once a borrower has received $10,000 of funds from a 529 plan to be used for paying a student loan debt, any further 529 distributions for this purpose will not be considered qualified. This rule applies to all 529 plans, and it is a lifetime limit; in other words, there is no workaround or way to bypass this rule. Say, for example, an individual’s parents have a 529 account as well as their grandparents, and they both want to use funds to help pay off student loan debt — only $10,000 from one of the accounts will be considered qualifying.

If, however, the individual borrower who has already received $10,000 in 529 plan funds to pay toward student loan debt decides to refinance any remaining student loan debt, it could theoretically be refinanced in someone else’s name (for example, a spouse). It may then be possible to apply an additional $10,000 toward that debt, so long as the new individual has not reached their own $10,000 limit for 529 distributions in relation to student loan debt.

The 529 beneficiary can be changed and parent loan debt also qualifies

If there are funds leftover from a beneficiary’s account, remember that the beneficiary can be changed at any time without penalty, and a parent can make themselves the beneficiary of their 529 account. 529 distributions can then be applied toward paying toward the parent’s loan debt, again, with the lifetime limit of $10,000. 

Be aware of 529 student loan qualification restrictions

Generally, federal and private student loans qualify, but be aware that not all private loans will meet qualifications. Here are the guidelines:

• Mixed-use loans are not considered qualifying. In other words, loans that include credit card debt or that are mortgage-related in addition to student loan debt will not qualify.
• Not all states have conformed to federal rules regarding qualifications. Check with your financial institution if you have any questions about your state’s rules when it comes to student loan debt. Even if the debt is considered qualifying under federal laws, using 529 distributions to pay toward student loans may still be subject to state tax penalties, so it is important to understand how your state operates regarding 529 restrictions.
• Loans from retirement plans do not qualify under any circumstances.
• There are very specific restrictions regarding student eligibility in terms of applicable 529 funds for the use of student loan debt payment.
  • Loans borrowed prior to 90 days of the date the college costs were paid do not qualify.
  • The student must have been enrolled on a half-time basis or greater during the term for which the loan was borrowed to qualify.
  • Continuing education programs do not qualify.
  • Students must be enrolled in a college or university that is eligible for Title IV federal student aid to qualify.

If you have additional questions or concerns about eligibility in terms of using 529 funds to apply toward student loan debt, please be sure to contact your financial professional.

You may also find answers to common questions you may have about saving for college and other education expenses on our FAQs page.