Using 529 to Pay for College Loans

[jayman060]

Currently, 529s cannot be used to pay off college loans for your child or yourself. However, there is legislation going through congress which may change this (which has bipartisan approval).

If this is happens, a lot will change on the strategy for using 529 funds. I am the non-custodial parent and if I use 529 funds to pay for tuition for my child then the payments become untaxed income for my child which will affect her eligibility for financial aid.

If I take out a parental student loan, then immediately repay it using 529 funds under the proposed law, this seems like it would be a work around to avoid the use of the funds impacting future financial aid.

Any thoughts?????????

[dcandmc]

If I take out a parental student loan, then immediately repay it using 529 funds under the proposed law, this seems like it would be a work around to avoid the use of the funds impacting future financial aid.

Any thoughts?????????

What is a "parental student loan"?

Under your scheme, you would still be paying money on behalf of your child, and as a non-custodial parent this payment would need to be reported on the child's FAFSA as untaxed income for the student.

Assuming the student is on a traditional academic schedule and graduates in four years, any money provided by you beginning with the spring semester of your child's sophomore will not be reported on financial aid documents.

[jayman060]

I'm referring to a Direct Plus Loan (Parent Plus Loan). I guess the question is really, do Direct (Parent) Plus Loans count as untaxed income for the student when applying for financial aid under FAFSA?

[dcandmc]

Money received, or paid on your behalf (e.g., bills), not reported elsewhere on this form. This includes money that you received from a parent or other person whose financial information is not reported on this form and that is not part of a legal child support agreement.

This is FAFSA question 45.j. in the Student's Untaxed Income section. As a non-custodial parent whose financial information is not reported on FAFSA, I would think that any funds you use to pay your child's expenses, whether those funds come from your checking account, from loans that were taken out in your name, or from any other source, must be reported on FAFSA (as long as it's not part of a legal child support agreement).