Federal Student Loans

[TwoRITTigers]

After my child graduates am I allowed to use any remaining balance in the 529 account to pay off a portion of his student loans?

[dcandmc]

If you're the 529 account owner, you can use the remaining balance in the account for anything you want. The question is, will you be able to use it without paying taxes on the earnings, as well as a potential 10% additional tax. As long as you take the 529 distribution in the same year that the qualified education expenses were paid which the distribution is reimbursing, you should be ok. It doesn't matter how the expenses were originally paid (so they could have been paid with a student loan). You will run into tax problems, however, if you take a 529 distribution in one year to pay off loans that were used to cover expenses that were paid in a different year.

[mark]

Just to be clear the last response. If you take out a loan in Jan 2018 to pay a qualified expense and then in Dec 2018 you withdraw 529 fund and pay back the loan, that is ok. However, if you withdraw 529 funds in Jan 2019 and pay off the loan, that is not ok. Is that correct?

I guess this all comes down to loans have nothing to do with determining qualified expenses. For example, if I use a $1,000 loan to pay my tuition and my total tuition is $10,000, I can still withdraw $10,000 from my 529 as qualified expenses.

[dcandmc]

Just to be clear the last response. If you take out a loan in Jan 2018 to pay a qualified expense and then in Dec 2018 you withdraw 529 fund and pay back the loan, that is ok. However, if you withdraw 529 funds in Jan 2019 and pay off the loan, that is not ok. Is that correct?

Yes, if the qualified expenses were paid in 2018, then the 529 withdrawal needs to happen in 2018 to pay for/reimburse those expenses. The original payment can't be tax-advantaged. For example, payments of tuition using a tax-free scholarship can't be reimbursed with a qualified 529 distribution; that would be "double-dipping." The proceeds from a student loan are not tax-advantaged, so for the purposes of a 529 it's the same thing as making the payment from your checking account.

I guess this all comes down to loans have nothing to do with determining qualified expenses. For example, if I use a $1,000 loan to pay my tuition and my total tuition is $10,000, I can still withdraw $10,000 from my 529 as qualified expenses.

Correct, as long as the $10k of total tuition payments and the 529 distribution took place in the same year, and the other $9k in tuition payment was from funds that weren't tax-advantaged.