Use 529 plan to pay off college loans?
Dear Dr. Don,
Can I continue to contribute money to our 529 college savings plan after our son has graduated, and withdraw from the fund in the future to pay his student loans?
— Pamela Pecuniary
The intent in taking distributions from a Section 529 college savings plan is to pay college expenses in the year they are incurred. Continuing to contribute to a Section 529 college savings plan after your son has graduated won’t provide a tax advantage in paying down his loans.
In the year that your son graduated, you can use Section 529 distributions to pay off a college loan, but the tax benefit is limited to the qualified education expenses for that year. SavingForCollege.com, a Bankrate company, provides additional depth on the topic in a Q&A page, “No tax perk if 529 money pays student loan.”
My handicapping of why it’s not allowed is that it would be too difficult to determine that the loan proceeds were used to fund qualified higher-education expenses, and that Section 529 college savings plans were designed to accumulate funds before and during the college years, not as a way to save on taxes post-graduation.
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