Reprieve from the Student Loan Debt Warden: Student Loans in Default Can Look to 529 Plans

Good to Know

5.2 Million

The number of student loans in default in early 2019 according to the Ascent’s Student Loan Debt Statistics for 2019

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.


Courtesy of the SECURE Act, repayment of student loan debt up to $10,000 per student is now a tax-free, penalty-free qualified distribution from 529 QTPs.

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.


The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide financial advice to clients. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog. As but one example of variations, Federal tax law and State tax law may treat QTP distributions differently.

Consult with your compliance department and a competent tax/529 QTP planning professional before discussing these matters with clients. This blog represents a preliminary understanding of the Secure Act. Additional guidance and clarification from the IRS are expected to address practitioner questions.