Personal Finance

Bill will allow 529 plan to pay off student loans

A pair of state legislators today announced a new proposed law that would broaden the availability of college savings plans and allow their use for student loan payments.

On January 13, Reps. Lynn Jenkins, R-Kan., and Ron Kind, D-Wis., introduced H.R.529, the "529 and ABLE Account Improvement Act of 2017."

Odilon Dimier | PhotoAlto | Getty Images

The bill addresses 529 plans, which grow on a tax-favored basis and from which you can take tax-free withdrawals to cover qualified educational expenses. As of the second quarter of 2016, there were $242.7 billion in 529 college savings plan assets, according to Strategic Insight.

This proposed law also includes ABLE accounts, tax-advantaged savings funds that are similar to 529s but drafted for the benefit of children with disabilities.

"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 in a statement.

Expanding availability

Jenkins' and Kind's proposed legislation aims to encourage funding 529 and ABLE accounts at the workplace by excluding up to $100 of employer contributions to these accounts.

In order to qualify for the exclusion, the contribution must be made to an account that lists an employee or a family member of the employee as a beneficiary, and it must be made as part of a payroll deduction program at work.

Further, the bill seeks an expansion of the tax credit small employers receive for setting up retirement plans. Those employers would receive a credit for the expenses related to establishing a payroll deduction program that will fund 529 and ABLE accounts.

Fund flexibility

For now, student loan repayment isn't considered a qualified educational expense. This means that if you withdraw from a 529 to pay your debts, you may be subject to income taxes and penalties.

The new bill addresses this hurdle by allowing you to use your 529 funds to pay your student loans.

The proposed law also allows individuals who have a 529 and an ABLE account to roll money over between the accounts, provided that both are for the benefit of the same beneficiary or family member of a beneficiary.

President-elect Trump could be a great thing for students saddled with college loans
President-elect Trump could be a great thing for students saddled with college loans

Finally, 529 investors would be allowed to rebalance their investments without it being considered an "investment direction." The IRS allows account holders to tweak their investments no more than twice in a calendar year.

Under the proposed rule, rebalancing your investments within the broad-based strategy you're using in your 529 would not be subject to that twice-yearly limit.