Can You Use a 529 Plan To Pay Student Loans?

A 529 plan can be an excellent tool to pay for college while saving a bit on your taxes. And as of 2019, you can also use some of these funds to make your student loan payments. This offers added flexibility and may even help you avoid a costly tax bill.

Using a 529 plan to pay off your student loans has some benefits, but it isn’t right for everyone, and there are some downsides to consider. Keep reading to learn the rules around using 529 funds for this purpose, the pros and cons, and some alternatives.

Current student loan refinance rates

Can you use a 529 plan to pay student loans?

The short answer is that, yes, you can use a 529 plan to pay your student loans, but this wasn’t always the case. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law by President Trump in 2019, lets borrowers use up to $10,000 from a 529 plan to pay the principal and interest on a qualified education loan.

This relatively new law could come in handy if you ended up having some of your 529 balance left when you graduated. It could also be a good option for parents who saved 529 funds for each of their children, but one didn’t end up needing the money.

Finally, a parent could use the 529 funds to repay a parent PLUS loan they took out for their children. They would simply need to change the beneficiary to themselves first.

What are the rules and limits under the SECURE Act?

The SECURE Act of 2019 expanded the definition of qualified education expenses to include student loan principal and interest, allowing you to use your 529 funds to repay your student loans. However, there are some limitations.

First, you can only put up to $10,000 of your 529 funds toward your student loans — and that’s a lifetime limit, not an annual one. Each of a beneficiary’s siblings can also use up to $10,000 from the same account to put toward their loans.

For example, if parents set up a 529 plan for each of their children and just one account had money left after all of their children graduated, they could use those funds to help pay off each of their children’s student loans.

Another limitation in this law is that if you use your 529 funds to pay for student loan interest, you can’t also claim the student loan interest tax deduction for those same funds, as the SECURE Act doesn’t allow this type of double-dipping of tax benefits.

What types of loans qualify for 529 repayment?

You can use 529 funds to pay the principal and interest of any qualified education loan. The definition of a qualified loan includes any loan incurred solely to pay for higher education expenses while you were a student. This includes both federal and private loans.

If you have federal and private loans and want to use your 529 plan to pay down your debt, think carefully about how you use it. Federal loans come with certain benefits, including income-driven repayment plans, forbearance or deferment options, and the potential for loan forgiveness. 

It might make sense to use your 529 funds to repay $10,000 of a private loan (especially if it has a higher interest rate), and pay down your federal funds more slowly.

Pros and cons of using a 529 plan for student loans

Using a 529 plan to pay for your student loans has some clear benefits, but there are also a few downsides.

Pros of using a 529 plan for student loans

“The biggest advantage is the tax benefit — withdrawals used for qualified loan repayments are federally tax-free, meaning borrowers can repay debt faster without added tax liability,” says Bethany Hubert, a financial aid specialist with Going Merry by Earnest. “It’s also a smart way for families to repurpose unused college savings rather than keeping those funds locked away for education expenses that may never come.”

The average student loan borrower graduates from college with $29,300 of student loan debt for their undergraduate degree, according to the latest College Board data, and the number is even higher for private schools and graduate programs. If you have a 529 plan that can help alleviate even a portion of your loan burden, you can consider it a win.

It’s also a significant benefit that the money can be used for multiple siblings. In a family of four college graduates with loans, for example, you increase the benefit from $10,000 to $40,000.

Cons of using a 529 plan for student loans

The low lifetime cap means the money may not make a huge dent in your loan balance. And because you can’t claim the student loan interest deduction, you’re losing out on some savings as well.

Another downside is that repaying your student loans may not be the best use of your 529.

“Honestly, 529 plans should be more of a backup to repay student loans,” says Robert Farrington, student loan expert and the founder of The College Investor. “Ideally, the 529 plan funds were spent on college directly, so you didn't need to borrow (or borrow as much).”

By saving your 529 money to use toward your loans after the fact rather than putting it toward tuition initially, you’re likely racking up unnecessary interest, not to mention any other financial impact from your loans.

Alternatives to using 529 funds to repay student loan debt

If you can't use 529 funds to pay down your student loans (maybe you don’t have a 529 or have earmarked that money for something else), consider these alternatives:

• Income-driven repayment (IDR) plans: If you’re having a hard time managing your federal student loan payments, using an income-driven repayment plan can help keep your payments low relative to your income. Just know it may take longer to pay off your loans.
• Employer tuition assistance: Many employers offer student loan tuition assistance as a benefit. Some offer direct contributions, either monthly or as a single lump sum, while others offer matching contributions, similar to 401(k) matching contributions. 
• Loan forgiveness: If you have federal student loans, you may be eligible for one of the Department of Education’s student loan forgiveness programs, which are available for teachers, public servants, and those who have made payments for a certain number of years under an IDR plan.
• Make extra payments: You can chip away at your loans faster by making extra payments, either monthly or as you have extra money available. Consider using windfalls like bonuses at work as extra payments for student loans.
• Student loan refinancing: Refinancing can help you combine your loans, potentially get a lower interest rate or monthly payment, and possibly become debt-free more quickly. Keep in mind that refinancing federal student loans means losing access to federal benefits like income-driven repayment, so be sure you don’t plan to use these perks in the future.