Can we use parents' 529 savings to pay for loan?

Paying for College
1

<p>My daughter got her college financial award package today. Fortunately the most were covered by grants. She only has $3500 for loan and $2700 for work-study. Can I use my 529 plan savings(it is custodian account for my daughter, but it is under my name, not hers) to pay for the loan and work-study so we don't have to pay interest? Or it is better to take the loan and pay back after she graduate? I am afraid if I pay it off this year, then next year when we apply for financial aid, the grant will be dramatically reduced since they think we can pay it anyway. Is that true? What is the best way to do it? If my relatives want to help to pay for the loan, will that affect the next year's grant?</p>

<p>If she can't do work-study, or can't work enough to pay $2700, does that mean we have to pay it? Is it possible to request more grant or re-evaluate the amount? Can we negotiate with financial aid officer? </p>

<p>Sorry since this is our first year of doing this, we have no idea how does it work? Can you give us advise please? Thanks a lot!</p>

2

<p>How much money do you have in that 529? Is there any chance she might lose some of her scholarship money in future years if her grades drop? Is she thinking about grad school?</p>

<p>You don’t have to start using up the 529 money her first year. You can hang onto it for future years. Provided you use it for eligible expenses related to her education it is OK. If that loan is a federal student loan, there are no restrictions on what she spends it on - in my day, I knew students who bought cars with their student loan money! For example, if she buys her own snacks, and pays for her own movies with money from that loan and/or money that she makes in a work-study job, you can use the 529 to pay for her books.</p>

<p>Also the work-study award is not completely guaranteed. She still will have to find a job at her college, and work the hours necessary to earn that money. Lots of students never earn their full work-study awards because they don’t work all the hours, or they can’t even get a job in the first place. Your daughter may find that she needs to tap into the 529 funds for her college expenses if she can’t pin down a work-study job.</p>

<p>Work-study income is designed to cover the student’s own personal expenses including something for text books, and something for the occasional snack. Depending on how your daughter lives at college, and how much she earns during the summer, she might not even need that work-study job in the first place.</p>

3

<p>

529’s are reported on the FAFSA, so the school already knew about the 529 when they awarded the financial aid.</p>

4

<p>Her loan is probably subsidized which means no interest until after she graduates. You really have to look at the whole picture. Do you have other kids for which the money could be used? How much are we talking about in the 529? Could you get stuck with the account unused if you don’t start using it? </p>

<p>What you will be getting in August, most likely, is the bill for her first term. It will include half the college expenses plus any up front fees that may be fully charged first semester. But the bill will be for room, board, tuition and fees. They will credit half of her loan and half of her grants. If her loan and grants can cover the amount, you will owe nothing and if they exceed it, she will get money back. Most likely, there will be a balance that has to be paid, and using the 529 money to pay it would be reasonable. </p>

<p>You are still going to be going out of pocket for big bucks most likely with your first child going off to college, and buying wardrobe, dorm room stuff like linens, taking the trip to the school, spending the day, eating, maybe staying at a hotel…all that adds up, my friend, it adds up fast. That comes out of pocket. Then you DD will have to buy her books and stuff, maybe computer connections for her dorm room and whatever at the bookstore. You can try to get the books cheaper on line, but usually the first time, many parents end up paying out of pocket. You can use 529 money for those books. Also, your DD is going to need “seed” money when you leave her, and it ain’t like slipping a $20 to her is gonna do it. Until she finds a workstudy job that fits her schedule and the hours alloted to her, and until she actually works the hours and gets the paycheck, which would likely be a week to months, she isn’t gonna see penny one from the Work Study award. And she is highly likely to need some living expense money for toothpast or other toiletries, So, you might want to use that 529 for what is owed on the school bill and to reimburse yourself for the book store bill–keep that receipt.</p>

5

<p>The loans are not automatic, by the way. She will have to sign a MPN (master promissory note) and read up on the terms and officially get the loan. Though at zero interest, it’s not a bad deal, but if you don’t need it, don’t take it. It really all comes down to how much you have in the 529 and how much in expenses you likely will face in future years. I don’t think you can use the 529 to pay off the Stafford loan can you? ANyone know?</p>

6

<p>Student loan repayment is NOT a qualified educational expense for the use of 529 funds.</p>

<p>I agree with cpt’s advice.</p>

<p>If the loan is subsidized, I would have her take it - no interest for 4 years is a good deal! Take it and the work/study, sit tight and see how things shake out this year in terms of how many other expenses you end up needing to pay.</p>

<p>If, in the latter part of the school year, you end up feeling like the 529 money is burning a hole in your pocket, keep in mind that any 529 funds you withdraw that don’t go toward qualified educational expenses will be subject to tax (on her return) <strong>only on the earnings portion</strong>, and that <em>up to the amount of scholarships/grants she received</em> will NOT be subject to the 10% tax penalty. So don’t sweat it, since any such tax is likely to be pretty minimal, if there’s any at all!</p>

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<p>I am also confused about what to do with my 529 plan. I set up a 529 plan years ago for my daughter assuming that we would not qualify for any aid. Life changed and we qualified for aid and now might have money left over in the 529 plan. What is the impact tax wise with respect to 529 plans when:</p>

<p>1) You get a scholarship. The post above seems to indicate that I (the parent) could make a withdraw up to the scholarship amount and my daughter would only be taxed on the earnings portion only with no 10% penalty. Can I wait until after she graduates?</p>

<p>2) You qualify for a Pell grant. Would taking withdrawals from the 529 plan impact her Pell eligibility?</p>

<p>3) You get a subsidized loan. </p>

<p>Is this a case where you count your blessings and gladly pay the penalties for overfunding your 529 plan.</p>

<p>We are considering the loan because it could make more money available for graduate school in the future.</p>

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<p>You are right on #1 re: the tax situation. In terms of waiting until after she graduates though, 529 withdrawals need to be made in the same calendar year in which the qualified educational expenses were paid, otherwise I believe the earnings on the withdrawal would be subject to tax plus the 10% penalty. Remember that for purposes of 529s, room and board count as qualified educational expenses, in addition to the usual tuition/mandatory fees + required books/materials/supplies.</p>

<p>For #2, the Pell grant would count as a scholarship, so earnings on withdrawals up to the total amount of ALL non-taxable scholarships or grants for that year would not be subject to the 10% tax penalty. I don’t know a lot about Pell eligibility - others here do. But it would surprise me if 529 withdrawals impacted Pell eligibility.</p>

<p>3) getting a subsidized loan wouldn’t have an impact on the amount you can withdraw from the 529 tax-free or penalty-free.</p>

9

<p>Thanks MomCat2.</p>

<p>I have a follow-up question about board. Due to food allergies, my daughter will probably take a limited food plan. Can I take a distribution from the 529 for a amount up to the cost of a full meal plan. With her food limitations, the actual cost will be greater than a full meal plan.</p>

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<p>Thanks all for your great advise! I learn a lot from you. To answer your question, currently we have about 60K in 529 from her deceased dad. My daughter is a good student and she promises to keep her grades good for the college as she did for high school, she will also plan to go to graduate school and maybe get a double major degree. Do you get similar financial package in graduate school? Or we have to pay more?</p>

<p>Based on your suggestion, if the loan is interest free while she is in school (I didn’t know that!), it will make sense to use it and pay it later. How about the work study? If she makes money, does that decrease her next year’s grant amount since student’s income count much more in FAFSA’s formula? Thanks!</p>

11

<p>

No grants, only unsubsidized loans from federal.
All the grants will be coming from the school.</p>

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<p>Don’t forget that paying off a student loan is ***not ***a qualified education expense for a 529 account withdrawal. It would therefore incur taxes and 10% penalties on the earnings part of the withdrawals. That could be quite costly, if the earnings are good and if you wait till after she graduates. So do be very aware of the timing of doing this.</p>

<p>Federal work study will not negatively impact her EFC next year. The student has to report it and any taxable scholarships/grants (anything in excess of tuition/fees/required books) on her taxes. They will be in the AGI that she must report on FAFSA, but other FAFSA questions ask how much WS and taxable scholarships are included in the AGI. They are deducted from the student’s AGI before calculating the EFC.</p>

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<p>Thanks again for your response! As many of you told me that paying off loans is not a qualified expense for 529 withdraw, this is hard to understand but I have to accept the fact and rules. </p>

<p>What is the different between subsidized loan and unsubsidized loan? Are both of them start to charge interest six months after you graduate from college ? But if you go to graduate school immediately after finish college, does the interest starts to occur or it can start until you finish graduate school?</p>

14

<p>An unsubsidized loan starts accruing interest the minute the loan is disbursed. If it is disbursed to your school tomorrow, interest starts tomorrow. You can defer *paying *it, but the interest will be accumulating. The rate is high (currently 6.8%).</p>

<p>A subsidized loan does not start accruing interest until you graduate or drop below half time enrollment. It used to be that the interest did not start being charged on a sub loan until the end of the 6 month grace period. This was changed (last year I think), and now interest on sub loans (issued after the change) starts at graduation (or dropping below 1/2 time). The rate is lower, about 3.4% I believe.</p>

<p>Repayment of loans can be deferred during grad school. Interest will continue to accumulate on the unsub loan. Interest is always charged on the sub loan. That is the difference (and the rate) between sub and unsub.</p>

15

<p>You might want to checkout the studentaid.ed.gov web site for more details. Although swimcatsmom answer was excellent.</p>

<p>It also appears that interest is not charged on subsidized loans that are in deferment. As swimcatsmon pointed out, interest on unsub loans never stops.</p>

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<p>There are a couple of points to clarify. For 529s, what’s important is to match qualified higher education expenses with 529 withdrawals during a calendar year. Any withdrawal in excess of the qualified expense is taxed and penalized.</p>

<p>Loan repayments are not qualified education expenses.</p>

<p>You can use 529 funds without tax or penalty for the year in which the qualified expense occurred. </p>

<p>If you have a $5000 tuition payment due in 2013 and you withdraw $5000 from your 529 in 2013 to pay it, then this is a qualified expense. Whether or not you have a loan is irrelevant in this situation.</p>

<p>If you have a $5000 tuition payment due in 2013, you take out a $5000 loan in 2013, and you withdraw $5000 from your 529, this withdrawal is still to pay a qualified expense, and the loan amount is still irrelevant.</p>

<p>If you have a $5000 tuition payment due in 2013, you had taken out a $10,000 loan in 2012, and you withdraw $5000 from your 529 in 2013, this withdrawal is still to pay a qualified expense.</p>

<p>If you have a $5000 tuition payment due in 2013, you had taken out a $10,000 loan in 2012, and you withdraw $10,000 from your 529 in 2013, then $5000 of the withdrawal is to pay a qualified expense and the remaining $5000 is subject to taxes and penalties.</p>

<p>You can imagine other scenarios, but in every case the loan is irrelevant; it’s the matching of the 529 withdrawal to the qualified expense in the calendar year that matters.</p>

<p>The logic is this makes sense in that there’s no requirement that the loan itself be used for qualified higher education expenses. The student could take the money and fly to Mexico on spring break (not recommended!)</p>

17

<p>

Some schools will issue 1098-T which reports the tuition that is BILLED, not what is paid in a calendar year. Since the tuition for the spring semester is usually due by Dec. 1 of the previous year (if you paid it in full every semester), it requires some planning on what is considered as qualified education expenses for the year the student graduates from college.</p>

<p>I do not know a simple and good solution. I tried school’s monthly payment plan (in order to document what we paid each month) but it helped in DS’s senior year only a little. Fortunately, we had almost run out of the money in our 529 plan by that time.</p>

18

<p>Don’t rely on the 1098t. Print out the statement from the Bursar’s office so that you know when items are billed, and so that you have a record of dates and amounts paid.</p>