Two legislators have introduced a proposed law that would allow students to use 529 plans to pay off their student loan debt without being subjected to income taxes and penalties, according to CNBC.
As of the second quarter of 2016, there was $242.7 billion in 529 college savings plan assets. A 529 is a tax-advantaged savings plan where you can take tax-free withdrawals to cover qualified educational expenses. Currently, student loan repayment isn’t considered a qualified educational expense.
Reps. Lynn Jenkins, R-Kan., and Ron Kind, D-Wis., are seeking to change that through H.R.529, the “529 and ABLE Account Improvement Act of 2017,” which they introduced to Congress last week. H.R.529 would allow individuals to use 529 funds to pay back student loans. The law also includes ABLE accounts, tax-advantaged savings funds similar to 529s but drafted for the benefit of children with disabilities.
Individuals who have a 529 and an ABLE account would be able to roll money over between the accounts, provided that both are for the benefit of the same beneficiary or family member of a beneficiary.
The legislation also aims to encourage funding into 529 and ABLE accounts at the workplace by excluding up to $100 of employer contributions. In order to qualify, the contribution must be made to an account that lists an employee or an employee’s family member as a beneficiary, and it must be made as part of a payroll deduction program at work.
“This bill will improve the program by encouraging employers to contribute to 529 plans and removing penalties for using the funds to pay for loans,” said Jenkins.
The proposed legislation would also allow individuals with 529 plans to rebalance their investments more than twice-yearly limit that the IRS currently places on account holders.
The help is greatly needed. Currently, the average student loan debt per graduate tops $28,000, amounting to a national toll of over $1.4 trillion. So far, there hasn’t been much progress towards eliminating that debt.
Other politicians have tried pitching their own ideas to solving the problem. After observing the success experience by Purdue, politicians have tried pushing the agenda with income share agreements as a viable way to pay for college. In other news, some state politicians, such as the ones in Minnesota, tried to implement their own way to consolidate student debt at a lower rate, a method currently not offered by the federal government.