Good to Know
That’s the bad news. The good news is that there may be a way out for students with balances remaining in their 529 Qualified Tuition Program.
Before the SECURE Act, distributions of deferred earnings from 529 Qualified Tuition Programs (QTPs) for nonqualifying purposes were subject to income tax and penalty. Repayment of student loans was a nonqualifying purpose; up to 50% of deferred earnings used to repay student loans was once lost to the government in penalties and income tax.
Now to the good news.
What could be better than a tax-free, penalty-free distribution from a parent’s QTP to repay student debt? Letting Grandma and Grandad in on the action!
- Before the SECURE Act, distributions from a Grandparent-owned 529 QTP to pay qualified expenses counted as student income and reduced (or eliminated) a grandchild’s student aid eligibility.
- In the wake of the SECURE Act, a grandparent can wait until the grandchild graduates and make a qualifying distribution of up to $10,000 to pay down their grandchild’s student loan debt.
If all of the above were not enough, the SECURE Act, for the first time in the history of 529 QTPs, now allows qualified distributions to pay for apprenticeship programs. Eligibility is broad and includes apprenticeships in fields such as manufacturing, health care, technology, construction and more.
Stay tuned! In our next blog we will uncover even more dramatic opportunities in the SECURE Act.