Beginning at the end of 2019 with the passage of the SECURE Act and then continuing with the CARES Act which was passed in response to COVID-19, there are important provisions that those with 529 plans and/or student loans should be aware of.
- In response to the pandemic and the fact that many colleges and universities switched to online learning, some institutions issued refunds on portions of housing and tuition.
- If funds were withdrawn from 529 plans to pay for the tuition/housing and that money was refunded, the amount that was refunded must be recontributed back into the 529 plan account within 60 days of receipt. If the money is not recontributed to the 529 account, it will be considered a non-qualified distribution and subject to income taxes as well as a 10% penalty.
- Another alternative to putting refunds back into the plan is to use the money for other qualified education expenses before year-end. For example, funds refunded for tuition can be used to purchase a computer or to pay down student loans (see below).
529 Plans to Pay Off Student Loans
- The SECURE Act expanded the definition of qualified education expenses to include up to $10,000 per beneficiary of student loan debt repayment. This means that up to $10,000 (per lifetime) can be withdrawn tax-free from a 529 plan to pay off student loans for the beneficiary and for the beneficiary’s sibling(s).
- If this is done, there are implications to the student loan interest deduction, but it is an option to consider for those who have student loans as well as balances left in 529 plans after graduation.
Suspension of Student Loan Repayment Requirements
- The CARES Act suspended payment requirements for most federal student loan borrowers (those with loans owned by the U.S. Department of Education) from March 27, 2020, to September 30, 2020. During this time, no payments on student loans are required and no interest will accrue
- If a borrower chooses to make payments during this period, the entire payment amount will be applied to outstanding principal balances.
- The CARES Act does not cover those with private loans. Borrowers should check with issuers for relief options during this time.
Employer Assistance with Student Loan Repayment
- The CARES act also modified provisions for Employer Educational Assistance. For 2020 only (unless it is extended), the definition of Educational Assistance was expanded to include not only tuition, fees, and textbooks, but also student debt repayment.
- Employers can provide up to $5,250 in Educational Assistance per employee and these payments will not be subject to income or payroll tax. In 2020, this includes student debt repayment.
- For this repayment to comply with the preferential tax treatment, the employer cannot give the employee the option of taking the $5,250 as a cash payment to do with as they choose – it must be used for Educational Assistance.
When determining the optimal course of action as it pertains to your education funding situation, there are multiple factors to consider including tax and cash flow implications, among others. We are here to help you determine the best course of action for you and your family – please contact our offices for assistance.