What do you do with a 529 college savings plan if student debt is forgiven?  - Reuters news in France and abroad

What do you do with a 529 college savings plan if student debt is forgiven? – Reuters news in France and abroad

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One way families can spend 529 college savings plans is by paying off student loans.

But what happens if this debt is cancelled?

It has been widely reported that President Joe Biden is leaning toward a $10,000 per borrower scrap plan. An official announcement from the White House is expected later this summer. This much relief would completely wipe out the balance of about 33% of student borrowers, or roughly 12 million people.

Currently, 529 account holders can use up to $10,000 to pay off student loans to the primary plan beneficiary and the beneficiary’s siblings. State-sponsored investment plans allow parents to deposit money and then withdraw it tax-free, provided the money is used for certain educational expenses.

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Fortunately, families who plan to use their 529 total savings to get a student loan balance will be able to spend the money in a number of other ways, experts say.

“If you have money left in a 529 plan, you have several options,” said Mark Kantrowitz, a higher education expert.

For one thing, if a parent still has a student loan balance after the forgiveness, they can make themselves the beneficiary of the account and use the money to pay off their debts. They just have to keep in mind that the $10,000 limit is a lifetime limit.

Changing beneficiaries is usually as simple as calling your plan and filling out a form, Kantrowitz said.

At this point, you can also transfer the beneficiary to another relative you want to help pay for tuition, said Douglas Bonbarth, certified financial planner and president of Bone Fide Wealth in New York.

“They can change the beneficiary to a large group of family members, including cousins ​​and grandchildren,” Bonbarth said.

You can also allow the account to sit and possibly use it for a grandson, said Kantrowitz, since there is no obligation to make a distribution: “You can leave it as a legacy to posterity.”

Kantrowitz said that parents can also make themselves the beneficiaries of the account if they want to continue their education. He said the accounts can be used for a wide range of continuing education, including professional certifications.

Under the plan’s rules, eligible higher education expenses generally include all tuition, fees, books and supplies, equipment, and room and board (if the student is enrolled at least mid-time), Kantrowitz said.

Finally, Bonbarth said, you also have the option to withdraw the money and receive the tax. These fees include income taxes and a 10% penalty on your winnings. But it may be worth it in some cases.

“After this money has been increased over 18 years or more, tax-deferred growth can outweigh the tax and the penalty for collecting it,” Bonbarth said.

Another advantage is that the tax rate you are subject to can depend on the recipient of the distribution, Kantrowitz said, “so you can pass the distribution on to the student, who is usually under the ‘much lower taxes’ category.”

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