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Can you Eliminate Your Student Loan Debt with 529 Plans?

Jan 21, 2013

The family members of the college students can take advantage of the 529 plans to pay off the student loan debts. Under section 529 plans, the parents of the college students can manage to save money to pay off debt. It is beneficial to save under this plan because the money grows tax deferred. Therefore, the contribution to the 529 plans is considered as tax deductible. If you withdraw the fund to pay off debt incurred due to default on student loan payment, then it is completely tax free. But you may not be able withdraw fund tax free on all education related expenses. So, you need to acquire more information on this program.

What are qualified educational expenses? 

The Internal Revenue Service has a wide definition for education related expenses, especially while handing out Section 529 tax papers. Under Section 529 plans, you can manage to withdraw fund related to college tuition, stationary and boarding expenses. The main purpose for designing the program is to help the family to pay college cost in the year when the expenses incurred. However, the college loan payment is not considered as qualified educational expenses as per the IRS.

How can you use 529 plans to pay off the student loan debt?

You can take benefit of the tax free withdrawal from a 529 plan, only if you use the fund directly to pay for money used for your higher education expenses or repay a loan in the same year you took out the loan. In any other circumstances, you may not get the tax break on the withdrawal and you may incur penalty of 10% on the withdrawal of the fund.

Are you aware of other education deductions?

Remember, you can avail tax deduction on the interest on a qualified student loan. In certain cases, some college expenses are deductible as well. According to the IRS rule, you can manage to deduct the cost of tuition, fees, books and etc.

What are tax credits?

Try to find out whether you’re eligible for the American Opportunity Tax Credit. You can manage to get tax credit worth 100% of the first $2,000 of qualified educational expenses. You may get additional 25% of the next $2,000 in qualified expenses; you can get $2,500 per student per tax year. You can avail the benefit for the first four years of a college education. But students in the second bachelor's degree are not eligible.

Therefore, you need to keep the above mentioned criteria in mind when you plan to use 529 plans to pay off debt.

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