Can 529 money be used to pay student loans?

[MonkeyMama]

The paperwork we have received does not match up because they don't include room and board and books on the 1098T. I believe this year, the IRS is also allowing a computer (I have to check on that). You can buy your books anywhere, so the school wouldn't have any way to report what you spent. (I don't know why they don't include room and board since it is paid to the school. )

I have a feeling the forms will evolve as time goes on.

Precisely. I mentioned that the 1098T was certainly not all inclusive. The IRS is certainly aware - it's not like you will get audited because you withdrew a reasonable amount for room and board.

[Taxplanr]

Zetta, your scenario is one of the reasons why I am always hesitant for parents to use a 529 in the first place. They are much better for grandparents to use and do not hurt when qualifying for grants and aid when held by the grandparent.

[Alex_Adviser]

Just a hypothetical question here. Suppose you had a kid in college who wasn't keeping their grades up. In that situation I might want to tell the kid he'd have to take out student loans for the next semester and I'd make payments according to the grades he earned. Would I be able to make student loan payments from the 529 plan without penalty? Or does 529 money have to go directly to the educational institution?

Withdrawals from a 529 plan are tax-free to the extent the account beneficiary incurs "qualified higher education expenses," or QHEE. The list of eligible expenses includes tuition, mandatory fees, books, supplies, equipment and the expenses of special needs beneficiaries. It also includes a capped amount of room and board if the beneficiary is at least a half-time student. However, QHEE does not include student loan repayments.

[disneysteve]

Withdrawals from a 529 plan are tax-free to the extent the account beneficiary incurs "qualified higher education expenses," or QHEE. The list of eligible expenses includes tuition, mandatory fees, books, supplies, equipment and the expenses of special needs beneficiaries. It also includes a capped amount of room and board if the beneficiary is at least a half-time student. However, QHEE does not include student loan repayments.

Alex, see the link I gave in post #2 above. As I read that, it says that you could use 529 funds to repay a student loan as long as you do so in the year in which the expenses were incurred.

[jIM_Ohio]

Does that mean the 529 money doesn't actually have to be used for educational expenses as long as there actually were educational expenses equal to the amount withdrawn? For example, could my kid borrow $5,000 for school and then I take $5,000 out of the 529 and use it to take a cruise?

DS-

I liked MM's response, and will add that HSA's work the same way... more or less.

The 529 is an account you withdraw from. The IRS decided on April 15 or when you file taxes if the withdraw was qualified. It does not track "every" receipt, just looks at a macro view of your yearly balance sheet.

For example in June if you pay a deposit of $2000 to a college for freshman year, then at Orientation in August pay another $8000, you have $10,000 of "qualfied" educational expenses for that year. If you withdraw $10,000 from a 529 and put in your checking account on Dec 24, then head to vegas for new years eve and blow all the 10k, the IRS books balance, they have no issue with
a) was a student load used to pay the 10k?
b) the time of year the 10k was taken from the 529
c) what the 529 was invested in at any time

HSA's are similar
as I read the HSA documents, I know we incurred 6k+ of health care expenses in Jan-Feb-Mar of 2009. Our HSA does not get its $6000th dollar of contribution until December. We may not withdraw the 6k until 2010 or later...

what my tax return will show is
6k of qualfied medical expenses
6k of HSA withdraws

in whatever year I take the money out of the HSA.