Are you on the lookout for ways to pay off your loans? Are you tired of going down a list of unhelpful tips found online? If so, then consider using a 529 college savings plan to pay student loans. A 529 plan can be a great way to jumpstart paying off debt. The governor of Florida, Rick Scott, once said that using his 529 plan to pay off student loans was a great move. And it’s not just smart for residents in Florida like Governor Scott; people across the country should know about this way to start paying down their debts.

Some people ask question such as; can you use coverdell funds to pay student loans or can i use my childs 529 to pay off my student loans. Some even want to know about, secure act 529 student loans. If all these is what you want to know about, then you are at the right place. Everything will be discussed in this article. Feel free to check out our website on other subjects like; what is a 529 plan for payments toward a qualified education loan, can you take a loan from a 529 plan, indiana 529 student loan repayment, 529 college savings plan and more.

529 plans to pay off student loans- FREE MONEY! That is the battle cry for many of us early in our career. In today’s society, it feels like you need a college degree to secure employment, yet tuition prices are rising at faster rates than inflation. Times are tough when you’re trying to pay off student loans while still providing food and shelter for your family. Student loan interest rates have been near historic lows which is a huge help to borrowers. Many of the students we advise opt in to the spouse borrower exception and get a lower interest rate. That helps tremendously but it’s still not enough to free themselves from their student debt prison.

nys 529 pay student loans

New York has a 529 plan called New York’s 529 College Savings Program (NY529) that can help you save for college. New York also has a 529 Able Plan as well.

If you live in New York, these might be good options for you to save for college. 

These programs are designed to help make college more affordable – so that you can get the education you need. By saving for college early on, you can make paying for college easier down the road.

If you’re not quite sure how 529 plans work, check out this starter guide to What Is a 529 Plan?

Average Cost Of College In New York

When saving for college in New York, it’s important to take into consideration the cost of attendance in the state. If you choose to go to an out-of-state school, you need to look at the average cost of attendance in that state.

There are 479 colleges and universities in the State of New York.

The total average cost of college (Cost of Attendance) in New York for in-state residents is $22,626 for 2020. This includes tuition, room and board, books and supplies, and other expenses.  

For just tuition alone, the average undergraduate tuition for in-state residents is $7,011 for 2020. The cost of tuition in New York has been rising at about 3.3% per year.

See how this compares to the average cost of college here. Keep in mind the average student loan debt by graduating class here.

Explore the data here.

New York 529 Plan Tax Information

Tax savings is one of the big benefits of using a 529 plan to save for college. On a federal-level, there is no tax savings for contributions, but qualified distributions are tax-free. 

Here are the special tax benefits and considerations for using a 529 plan in New York.

Contributions

New York offers a state tax deduction for contributions to a 529 plan of up to $5,000 for single filers and $10,000 for married filing jointly tax filers.

Minimum: There is no minimum contribution.

Maximum: Accepts contributions until all account balances for the same beneficiary reach $520,000.

Rollovers

Rollovers into the state plan are allowed but not eligible for a tax deduction.

Outbound rollovers are treated as non-qualified withdrawals.

Qualified Distributions

Qualified distributions from a New York and non-New York 529 plan are tax-free. 

K-12 Education

New York does not conform with Federal law in regards to using a 529 plan for K-12 tuition. See this guide: Using a 529 Plan For Elementary and High School Private Education.

Student Loans

New York does not conform with Federal law for using a 529 plan for student loans.

Non-Qualified Distributions Taxes, Penalties, Recapture

A non-qualified withdrawal from a New York 529 is subject to New York income tax to the extent of prior tax deductions (recapture). 

New York 529 College Savings Plan Options

New York has several 529 plan options – one consumer plan and one plan that is sold by financial advisors (we’re big advocates of doing-it-yourself, you don’t need to pay a financial advisor for this). 

New York’s 529 College Savings Program

New York’s 529 College Savings Program (NY529) is the name of New York’s 529 Plan. This plan offers a variety of investment options, including age-based portfolios that become more conservative as the child approaches college, and static investment fund options.

The funds offered include Vanguard.

Fees:

There is a program management fee of 0.13%.

The underlying funds fees are included in the program management fee.

Who Should Use It:

We recommend that New York residents use the New York 529 College Savings Plan due to the tax benefits, low fees, and plan investment options.

New York 529 Able Plan Options

529A Able accounts are accounts designed to help those with disabilities escape poverty and save for themselves. Learn more about 529A Able Plans here. 

NY ABLE

The NY ABLE Savings Plan is a 529A plan open to all residents in New York.

This plan allows contributions of up to $15,000 per year from all sources.

It does have a minimum initial contribution amount of $25 per account. The minimum subsequent contribution amount is $25.

The plan does have an account maintenance fee of $55 annually, assessed at $13.75 per quarter. It also has a program management fee of 0.36% to 0.38%.

You can open an NY ABLE Plan here.

Other Programs To Save For College

A 529 plan is one way to save for college. Remember, we have a full guide on our approach to college savings here – and it helps you find other options.

If you’re looking for ways to boost your college savings, check this out:

CollegeBacker

CollegeBacker is one of our favorite ways to save for college because they make gifting for college so easy. You can setup an account, link your 529 plan (in most states), and get a unique URL that you can share with friends and family to save for your children’s college.

Plus, they have Backer Bucks, which allow you to earn rewards and rebates for the shopping you already do – directly deposited into your children’s 529 plan.

Upromise

Upromise is another awesome tool to help you save for college because they have a lot of ways that you can earn money for your 529 plan. You can get rebates and rewards, and you can get cash back into your child’s 529 plan by using the Upromise credit card.

New York Financial Aid

Using a 529 plan isn’t the only way to save money for college. Each state typically offers a variety of financial aid programs for their residents. These include scholarships and grants, and sometimes unique forgivable student loan opportunities.

can i use my childs 529 to pay off my student loan

Families concerned about both paying for college and tackling postgraduation student debt now have more options: The rules governing how 529 college savings plans can be used have expanded again.

First introduced in 1996, 529 plans offer parents a way to save for college expenses for a designated beneficiary. Families contribute money after taxes to these accounts, which grows on a tax-deferred basis and can be withdrawn tax-free if it’s used to pay for qualified education expenses. In addition, some states offer special tax benefits for 529 plan contributions.

A law signed by President Donald Trump in December 2019 added a new qualified expense that can be paid for by 529 plans: student loans.

The Setting Every Community Up for Retirement Enhancement Act, a spending bill 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.

Prior to these changes, any withdrawals for the purpose of student loan payments were subject to income taxes and other penalties. The new 529 plan rules begin retroactively, starting with the beginning of 2019.

This is the second of two major additions to the list of qualified expenses in recent years. The Tax Cuts and Jobs Act of 2017, which went into effect on Jan. 1, 2018, expanded the use of 529 plans to include paying for private school tuition for kindergarten through 12th grade, up to $10,000 per year. Other qualified 529 expenses include tuition and fees, books and supplies, room and board, and computers.

[ READ: Student Loan Disability Discharge: What to Know. ]
Despite the advantages of 529 plans, just 30% of college savings are held in these accounts, according to How America Saves for College, a 2018 report from Sallie Mae. General savings accounts are the most commonly used account type by college savers.

Awareness of 529 plans and their tax benefits has long been a problem. Per Sallie Mae’s findings, 51% of college savers have not heard of 529 college savings plans, and 74% of individuals earning less than $35,000 say they have not heard of 529s compared with 35% of individuals with an income of more than $100,000.

There are several possible 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; repaying loans a parent borrowed to pay for a child’s college education; or minimizing the impact of a grandparent-owned 529 plan on a student’s eligibility for financial aid.

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 in the case of 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.

In the case of a grandparent-owned 529 plan, any money withdrawn and used to pay for college expenses is considered income to the student that has to be reported on the Free Application for Federal Student Aid, known as the FAFSA, which could then affect the student’s eligibility for need-based financial aid. Changes introduced in the SECURE Act offer grandparents a new way to help out without affecting financial aid eligibility. A grandparent can now 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.

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The changes established by the SECURE Act expand 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.

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“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, their benefit that they offer on these things is not that big relative to what some of the states offer.”

Though it may be rare, he says there are a few circumstances 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 in order to receive benefits including the ability to repay the debt using 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 with the purpose of saving to 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 wrote in an email. “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.”

[ READ: How to Choose a 529 Plan on Your Own. ]
Ultimately, the impact of the 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 wrote in an email. “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 find his or her child doesn’t want to attend college also has a new option as a result of the SECURE Act. Previously, a parent’s primary option in this situation would be to transfer the 529 plan to a family member such as a sibling, first cousin or aunt, or even to themselves, to use for qualified education expenses. Now, the law also allows individuals to use their 529 distributions to pay for apprenticeships, giving students a new route to take advantage of the savings accounts without risking penalties.

Families and borrowers interested in taking advantage of the new law should check their specific plan before making any withdrawals, experts say.

“The big unknown is how the states will react,” Kantrowitz wrote. “We do not yet know which of the 30+ states with state income tax deductions or tax credits will allow them to be used with student loan repayment. If the addition of K-12 tuition by the Tax Cuts and Jobs Act of 2017 is any indication, probably 21 of the states will allow it. The others will treat using 529 plan funds for student loan repayment as an non-qualified distribution.”

We’re proud to announce a new 529 plan option for paying back student loans.

It can be used for undergraduate and graduate courses, as well as for trade school.

Contributions are made with after-tax dollars and grow tax-free. Tax-free distributions are allowed, and the amount is adjusted for inflation.

Typically, you can contribute up to $15,000 per year per beneficiary (a person or organization that receives a benefit). If you have more than one kid in college, then you can contribute up to $30,000 per year. You can also give up to five years’ worth of gifts at once ($75,000 per kid). The 529 plan is flexible enough to allow you to change beneficiaries if your oldest child decides not to go to college anymore or if they graduate before their younger sibling starts school

The 529 plan is a state-sponsored savings plan that can be used to help your child pay for college. This document explains how you can use this plan to pay back your student loans.

There are two types of 529 plans: 529 prepaid tuition plans and 529 savings plans. While the prepaid tuition option has been used less in recent years, both plans have grown in popularity, increasing by about $3 billion from 2007 to 2008 alone (College Savings Plans Network).

While the prepaid tuition option has been used less in recent years, both plans have grown in popularity, increasing by about $3 billion from 2007 to 2008 alone (College Savings Plans Network).

There are two types of 529 plans: 529 prepaid tuition plans and 529 savings plans. While the prepaid tuition option has been used less in recent years, both plans have grown in popularity, increasing by about $3 billion from 2007 to 2008 alone (College Savings Plans Network).

The benefits of this plan are that you will get a tax deduction on what you save into it each year, as well as any interest earned if you choose to invest those funds instead of just holding them in cash. You will also not have to pay taxes when withdrawing money from your account for educational purposes – including paying off student loans!

can you use coverdell funds to pay student loans

Coverdell Education Savings Account (ESA)

What Is a Coverdell Education Savings Account (ESA)?

A Coverdell education savings account is a tax-deferred trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries who must be 18 years old or younger when the account is established. The age restriction may be waived for special needs beneficiaries. While more than one ESA can be set up for a single beneficiary, the total maximum contribution per year for any single beneficiary is $2,000.¹

KEY TAKEAWAYS

• Coverdell funds can be used to pay a wide variety of expenses for young people (grades K-12) attending eligible schools. 
• Coverdell funds must be used by the time a student is age 30 or taxes, fees, and penalties will accompany withdrawals. 
• The cut-off amount for family member contributions to a Coverdell Education Saving Account is $2,000 a year. 

How a Coverdell Education Savings Account (ESA) Works

Formerly called an education IRA, the ESA allows families to increase investment earnings through tax-deferral as long as the funds are used for educational purposes.

For example, if you contributed $500 to an ESA and it appreciated to $5,000 in 10 years, the earnings would not be taxed until the account’s owner was enrolled in a post-secondary institution.

When the contributions are distributed, they are tax-free assuming they are less than the account holder’s annual adjusted qualified education expenses, including tuition, books, equipment, special needs services, and even academic tutoring. ESA account funds can be used for primary and secondary schools (grades K-12) as well as higher education.

Coverdell ESAs are only available to families that fall under a designated income level.

In the event that the distributions are higher than the expenses, the gains are taxed at the account holder’s rate, rather than the contributor’s rate, which is typically higher.

Coverdell Education Savings Accounts vs. 529 Plans

ESAs may be established at brokerages and other financial institutions. These accounts are comparable to another tax-free college savings plan, 529, with a number of differences. There is no annual limit on the amount that may be deposited into a 529 plan.

In December 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) expanded 529 plan regulations, and now 529 plans can be used to pay off up to $10,000 in student loans and to pay for qualified expenses related to apprenticeship programs approved by the U.S. Department of Labor.²

There are no restrictions on the income level of the contributors to a 529 plan. However, fees can be extracted from 529 accounts and the investment can also lose money as there are no guaranteed returns on such plans. It is permissible to have a 529 plan as well as an ESA for the same beneficiary’s education expenses.

Special Considerations

The contributions put toward a Coverdell ESA must be made in cash and are not deductible. Contributions can be made by individuals with modified adjusted gross income that falls within an annual limit. In addition to individuals, corporations and trusts may make contributions to an ESA without the restriction on adjusted gross income.

Upon the beneficiary reaching age 30, any remaining funds in the ESA must be disbursed, unlike a 529 plan. The exception to this rule is if the beneficiary qualifies as a special needs beneficiary. It is also possible to make certain transfers from the account to members of the beneficiary’s family.Compete Risk Free with $100,000 in Virtual CashPut your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you’re ready to enter the real market, you’ve had the practice you need

can i use my childs 529 to pay off my student loans

Paying Student Loans With 529 Plan Funds

A new law allows borrowers to use 529 college savings plans to pay off student loan debt.

Use 529 Plan Funds to Pay Student Loans

Families concerned about both paying for college and tackling postgraduation student debt now have more options: The rules governing how 529 college savings plans can be used have expanded again.

(GETTY IMAGES)

First introduced in 1996, 529 plans offer parents a way to save for college expenses for a designated beneficiary. Families contribute money after taxes to these accounts, which grows on a tax-deferred basis and can be withdrawn tax-free if it’s used to pay for qualified education expenses. In addition, some states offer special tax benefits for 529 plan contributions.

A law signed by President Donald Trump in December 2019 added a new qualified expense that can be paid for by 529 plans: student loans.

The Setting Every Community Up for Retirement Enhancement Act, a spending bill 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.

Prior to these changes, any withdrawals for the purpose of student loan payments were subject to income taxes and other penalties. The new 529 plan rules begin retroactively, starting with the beginning of 2019.

This is the second of two major additions to the list of qualified expenses in recent years. The Tax Cuts and Jobs Act of 2017, which went into effect on Jan. 1, 2018, expanded the use of 529 plans to include paying for private school tuition for kindergarten through 12th grade, up to $10,000 per year. Other qualified 529 expenses include tuition and fees, books and supplies, room and board, and computers.

Despite the advantages of 529 plans, just 30% of college savings are held in these accounts, according to How America Saves for College, a 2018 report from Sallie Mae. General savings accounts are the most commonly used account type by college savers.

Awareness of 529 plans and their tax benefits has long been a problem. Per Sallie Mae’s findings, 51% of college savers have not heard of 529 college savings plans, and 74% of individuals earning less than $35,000 say they have not heard of 529s compared with 35% of individuals with an income of more than $100,000.

There are several possible 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; repaying loans a parent borrowed to pay for a child’s college education; or minimizing the impact of a grandparent-owned 529 plan on a student’s eligibility for financial aid.

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 in the case of 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.

In the case of a grandparent-owned 529 plan, any money withdrawn and used to pay for college expenses is considered income to the student that has to be reported on the Free Application for Federal Student Aid, known as the FAFSA, which could then affect the student’s eligibility for need-based financial aid. Changes introduced in the SECURE Act offer grandparents a new way to help out without affecting financial aid eligibility. A grandparent can now 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 expand 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.PauseUnmuteLoaded: 100.00%Current Time 0:12/Duration 0:53

“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, their benefit that they offer on these things is not that big relative to what some of the states offer.”

Though it may be rare, he says there are a few circumstances 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 in order to receive benefits including the ability to repay the debt using 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 with the purpose of saving to 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 wrote in an email. “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 the 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 wrote in an email. “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 find his or her child doesn’t want to attend college also has a new option as a result of the SECURE Act. Previously, a parent’s primary option in this situation would be to transfer the 529 plan to a family member such as a sibling, first cousin or aunt, or even to themselves, to use for qualified education expenses. Now, the law also allows individuals to use their 529 distributions to pay for apprenticeships, giving students a new route to take advantage of the savings accounts without risking penalties.

Families and borrowers interested in taking advantage of the new law should check their specific plan before making any withdrawals, experts say.

“The big unknown is how the states will react,” Kantrowitz wrote. “We do not yet know which of the 30+ states with state income tax deductions or tax credits will allow them to be used with student loan repayment. If the addition of K-12 tuition by the Tax Cuts and Jobs Act of 2017 is any indication, probably 21 of the states will allow it. The others will treat using 529 plan funds for student loan repayment as an non-qualified distribution.”

secure act 529 student loans

The SECURE Act Expands Use of 529 Plans

The Act allows 529 distributions to pay back student loans and may give grandparents a new way to take advantage of their savings.Jonathan Hughes

The 529 SECURE Act just signed into law by President Trump makes an important change to how 529 college savings funds can be used. The Act has established a benefit frequently sought by parents and grandparents: the ability to use 529 distributions to pay back student loans. That is, owners can withdraw their 529 funds tax free and make payments against their or their children’s student loan balances after college. This not only allows parents to help pay off their students’ loans, but may help an unexpected group of 529 owners with a new way to take advantage of their savings: grandparents.

Grandparent giving

Grandparents who have set up 529 plans for their grandchildren may face unintentional consequences when using those funds to pay for their grandchildren’s college education. The FAFSA considers all 529 plans owned by parents as parent assets. As such they carry minimal weight in the calculation of financial aid eligibility (a good thing for families). But the FAFSA doesn’t ask for financial information from anyone else. As such grandparent-owned 529s are not seen as assets.

The student income impact

However, the FAFSA does ask for a family to report any monetary support received on the student’s behalf from anyone other than the parents. That support counts as student income in the year it is used to pay for college costs. For example, if a grandparent distributes $5,000 from a 529 to pay a student’s bill in his or her freshman year, the student must report that $5,000 as income received in that year. Student income reported can have a significant amount on financial aid eligibility depending on the amount.

Helping with repayment

Grandparent owners who don’t want to risk affecting their student’s financial aid eligibility can now use up to $10,000 (in total) to relieve their grandchildren’s student loan burden after graduation. There is one wrinkle to this feature: if a student uses a 529 plan to pay back student loans, the student may not deduct the student loan interest paid that tax year she may have been eligible to do otherwise. That’s just something to keep in mind.

Apprenticeship opportunities

This isn’t the only expansion in the SECURE Act. Now, 529 distributions can be used for textbooks, fees, and equipment related to apprenticeship programs. These job training programs are commonplace in a wide variety of fields.

With these new changes to 529 regulations, saving for college has become even more beneficial for families. Don’t wait to start saving. Even a small amount saved each month can have a dramatic effect when it comes time to pay the college bill.