Families concerned about paying for college and tackling postgraduation student debt may have more options than they realize. The rules governing how 529 college savings plans can be used have expanded in recent years.
First introduced in 1996, 529 plans allow parents to save for college expenses for a designated beneficiary. Families contribute after-tax money to these accounts, which grow on a tax-deferred basis and can be withdrawn tax-free if used to pay for qualified education expenses. In addition, some states offer special tax benefits for 529 plan contributions.
In 2019 a new law added a new qualified expense that 529 plans can pay for: student loans.
[Read: Best Private Student Loans.]
How to Pay of Student Loan Debt With a 529
The Setting Every Community Up for Retirement Enhancement Act, known as the SECURE Act, established a lifetime limit of $10,000 from a 529 plan that can be used without any penalties or tax consequences to repay the beneficiary’s student loans, including federal and most private loans. An additional $10,000 can be used to repay student loans held by each of the beneficiary’s siblings. Before these changes, any withdrawals for student loan payments were subject to income tax and other penalties.
This is one of several major additions to the list of qualified expenses in the last decade. The Tax Cuts and Jobs Act expanded the use of 529 plans to include paying for private school tuition for kindergarten through 12th grade, up to $10,000 per year per beneficiary. Other qualified 529 expenses include tuition and fees, books and supplies, room and board, and computers.
Despite the advantages of 529 plans, only 32% of families use them, according to How America Pays for College, a 2025 report from Sallie Mae.
There are several scenarios in which it could be useful to pay off student loans through 529 plan distributions. According to Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com, these could include using money left over from a sibling’s 529 plan; tapping into surplus 529 funds that are available as a result of a student graduating from college in three years instead of four; or repaying loans a parent borrowed to pay for a child’s college education.
The beneficiary of a 529 plan is typically the student, but the account owner can change the beneficiary to be a parent. This could be helpful for those who took out Parent PLUS loans to pay for their child’s college education, allowing them to use 529 money to repay the loans.
Since the 2024-25 aid year, distributions from grandparent- or other non-parent-owned 529 plans are no longer reported as untaxed student income on the Free Application for Federal Student Aid, known as the FAFSA. Grandparents can also wait until after the grandchild graduates to take a 529 plan distribution, which can be used to pay back any student loan debt that accrued, up to $10,000. The changes established by the SECURE Act expanded the pool of individuals who can receive the tax benefits of a 529 plan, says Jason Delisle, resident fellow at the American Enterprise Institute, a District of Columbia-based think tank.
“If you didn’t have the cash to save for a 529 and instead you or a dependent then had to take out a student loan, but later on you ended up with the cash, now you can get the 529 benefit,” Delisle says. “But from the federal government’s point of view, the benefit that they offer on these things is not that big relative to what some of the states offer.”
[Read: Best Student Loan Refinance Lenders.]
Why You Might Have 529 Funds and Student Loans
In most cases a borrower will exhaust their 529 fund savings before they turn to student loans. There are a few circumstances, however, in which individuals have both leftover 529 funds and student loans. For example, individuals may try to avoid selling their 529 investments when the stock market is down, or they may borrow student loans they don’t need to receive benefits, including the ability to repay the debt with 529 funds.
In certain cases, Kantrowitz says, it may even make sense for individuals who graduated from college years ago to open a 529 plan to help pay off their student loans. This could be smart strategically if a student is in graduate school, for example.
“Deferring the loans while one can afford to make payments now might not make sense, since the loans probably continue to accrue interest,” Kantrowitz says. “Still, maybe they are in graduate school or maybe their grandparents want to help them repay their student loans. More likely, they have a younger sibling who was unable to use all their 529 plan money for some reason. Say the sibling got a full scholarship or is enrolled at a U.S. military academy and the parents want to use the leftover money to help the student who already graduated to pay down their student loans.” Ultimately, the impact of those changes to 529 plans may not be significant for most families, according to Brent Weiss, a certified financial planner and chief evangelist at Facet Wealth, a financial planning firm.
“It’s a low-impact benefit, but it does create flexibility for many American families. Saving for college can feel like a daunting task, and it’s often hard, without the help of a professional, to understand how much to save and the best ways to do so,” Weiss says. “Giving families more flexibility with how they can access their funds will ease the anxiety around locking up money for a single purpose when it can be hard to predict what costs will ultimately be.”
Any parent who has invested in a tax-advantaged 529 plan only to later find the child doesn’t want to attend college still has options. The 529 plan owner can transfer it to another eligible family member, such as a sibling, first cousin or aunt or even to themselves, to use for qualified education expenses. Individuals can also use their 529 distributions to pay for apprenticeships, giving students another way to use the savings accounts without risking penalties.
Families and borrowers should check their specific plan before making any withdrawals.
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What to Know About Paying Student Loans With 529 Plan Funds originally appeared on usnews.com