Use 529 cash to pay college loan?
Dear Dr. Don,
My son is now in graduate school and is paying for it himself. May I use the money left in his 529 plan to pay off some of his undergraduate loans?
— Diane Diplomas
You can’t raid the Section 529 plan to pay off his student loans and capture the tax benefits associated with distributions out of the plan for qualified higher education expenses. Savingforcollege.com, a Bankrate company, discusses this issue in a Q&A, “No tax perk if 529 money pays student loan.”
Work with your tax professional if you’re uncertain how much you can repay using this approach.
An alternate approach is to use the Section 529 monies to pay his qualified higher education expenses in graduate school, assuming the 529 plan allows it. (Most state plans do allow it.) Depending on how he is funding his graduate studies, he may be able to use the money you free up in his graduate school budget to pay off some of his undergraduate student loans.
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