Strategies For Managing Student Loan Debt
By: Will Rahjes
If college were a party, then student loans are the hangover.
As part of a debt-ceiling agreement forged by President Joe Biden and House Speaker Kevin McCarthy, monthly student loan bills will resume in about 60 days. This will be the first-time student loan borrowers have had to make payments in 3 years. The average payment is nearly $400 per month.
Did you know you can use a 529 college savings plan
to help pay off student loans? In December 2019, the SECURE (Setting Every Community Up for Retirement Enhancement) was signed into law and added this special provision.
Qualifications to Use a 529 Plan to Pay Student Loans
To utilize the SECURE Act’s provision for 529 plans and student loan repayment, you must meet the following requirements:
- Amount & Beneficiary: The amount of the distributions cannot exceed $10,000 of principal and interest for qualifying student loans. One of the provisions of the law is that 529 plans owners can use their funds to pay off up to $10,000 of the account beneficiary’s student loans. Keep in mind that the $10,000 lifetime limit is per beneficiary, not per account. Borrowers can’t bypass the $10,000 limit by having two or more 529 plans.
- Eligible loans: Qualifying loans include both federal and private education loans. Other loans, such as personal loans, home equity loans, or loans from retirement plans, are not eligible.
- Taxes: If you take advantage of this provision and withdraw money to repay student loans, you cannot claim the student loan interest tax deduction for debt you repaid.
Nebraska 529 Plan Savings
For those using the Nebraska 529 plan, Nebraska tax savings are a big benefit. Account owners are eligible to receive a Nebraska state income tax deduction of up to $10,000 ($5,000 if married, filing separately) for contributions made to their own NEST accounts. Therefore, a borrower, or parent willing to pay for student debt, would put up to $10,000 into a 529 plan and pick up almost 7% as a Nebraska state tax deduction. The net benefit would be $700 in tax savings for up to $10,000 in loan payments they have to make anyway.
Ready to take the next step?
There are certain cases where it may make sense for individuals who graduated from college years ago to open a 529 plan with the purpose of saving to pay off their student loans. If the “hair of the dog” won't cure this headache, this might be a strategy to consider. Let’s team up to discuss a strategy to meet your specific situation.