<p>I'm planning to finance my son's college costs by using a loan program offered by the private university he will attend. Under this program, a parent can borrow an amount an the beginning of the student's freshman year equal to total estimated costs for four years (tuition and room & board) minus estimated financial aid. (Costs are estimated at first year rates -- by prepaying you avoid increases in subsequent years.) The loan can then be repaid over ten years. My question is: Can I use distributions from my 529 account to cover these loan payments? The initial answer I got from the 529 account administrator was that I couldn't -- that distributions can't be used to repay loans. That doesn't feel right to me, when the loan consists solely of costs that would be eligible if paid directly.</p>
<p>I've checked IRS Publication 970, but couldn't find anything that came close to addressing this situation. Have any of you dealt with this situation?</p>
<p>You can't use 529 account money to pay loan payments as the withdrawals can only be used to cover qualified education expenses in the same year you make the withdrawal. </p>
<p>One thought - how does the actual loan work with the school? Is it paid to you and then you use it to pay each year? Or do they keep the money and dole it out? If the loan money is in your hands I think you could withdraw the 529 account money each year (while student is in school) to 'pay' for qualified expenses thus making it a qualified withdrawal.</p>
<p>Thanks for the quick response. As I understand how it works. the University holds the loan proceeds, essentially as prepayment of future costs (subject to refund if my son enrolls elsewhere in later years).</p>
<p>What I had to do one year was pay a balance with my credit card that was owed to the university so that my son could register for classes. A month later, he got loan proceeds which went directly to his university account. The university then reimbursed me what I had paid. I understand this is done a lot. So if you get the loan and then pay the university with the 529 money, the univ should reimburse you the excess.</p>
<p>I am pretty sure for tax purposes you could still consider 529 account withdrawals as being used to pay for qualified expenses despite the loan. If you look at all the various rules for the various tax credits such as the Hope and LL credits and 529 withdrawals borrowed funds not used to reduce qualified expenses. For instance for the Hope credit</p>
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Paid with borrowed funds. You can claim a Hope credit or qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the Hope credit for year in which the expenses are paid, not the year in which he loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student’s account.