By Mark Kantrowitz. The SECURE Act , which became law on December 20, as part of an annual appropriations bill, allows families to use a plan to pay student loans. But, why would anyone want to use a plan to repay student loans? After all, the best use of plan money is to spend it up front, to avoid the need to borrow student loans at all. But, despite all of the planning, sometimes families have leftover plan funds as well as student loans, and want to use the leftover money to repay the student loan debt.
There are several situations in which a family might have both student loans and leftover plan money. The AOTC is worth more, per dollar of qualified expenses, than a tax-free distribution from a plan.
Using the plan to repay student loans avoids both the tax penalty and the income tax on the distribution. If you have this type of account or are thinking about starting one, you may be wondering — can you use your plan to pay down student loans? A plan is a savings account for educational expenses. Any U. The owner of the account will be able to name anyone with a Social Security number as a beneficiary.
The account owner can also be the beneficiary. Some states also allow you to make deductible contributions. And as long as the money is withdrawn for qualifying educational expenses, withdrawals should be federal tax-free. Keep in mind that not all states consider student loan payments to be eligible, so while you may not pay federal taxes, you may pay state taxes depending on where you live. Qualifying educational expenses include many costs associated with K education, college education, apprenticeship programs, and even student loans.
However, there are some restrictions on student loan payments to be aware of. Popular Courses. Part Of. Best Plans. Loan Basics Student Loans. Key Takeaways plans are tax-advantaged savings plans originally designed to cover the costs of post-secondary education of the plan holder's beneficiary. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
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Related Articles. Roth IRA for College. Partner Links. Related Terms A Guide to Plan A plan is a tax-advantaged account that can be used to pay for qualified education costs, including college, K, and apprenticeship programs.
You can change the beneficiary if you choose to do so. Plan for using that money to go towards tuition and fees, etc. However, there are a few circumstances when it does make sense to use college savings plan to pay off student loans:. If you already filed your tax return for , you can file an amendment if you paid a tax penalty for withdrawing money from your plan and get a refund.
The only real restriction is the name on the loan. If the loan is under their name, they are the one who can withdraw the funds for student loans if they are also the beneficiary of the plan account. Beneficiaries of the plan account can be changed, so you may want to do so first if the beneficiary is not the same as the person you want to use the account at that point.
That would be considered double dipping on a tax advantage. When calculating how much to deduct for the student loan interest deduction, just subtract the amount of interest your student loan services says was paid off by the payment you made from your plan account.
Bottom line: Part of the design of plans is for the accounts to be able to be switched out among family members as needed.
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