Alternative Uses for Your 529 College Savings Plan

In mid-June, the White House is hinting at yet another extension for the student loan payments moratorium. Set to expire on Aug. 31, the pause could extend beyond the 30-month mark. With President Biden set to announce a decision on student loan forgiveness in the coming months, this could be a sign of forgiveness to come. Naturally, some borrowers wonder: What will I do with my 529 college savings plan if Biden forgives student loans?

Fortunately, 529 college savings plans allow for alternative uses, so your money won’t go to waste even if the U.S. forgives your student loans.

In general, a 529 college savings plan is a state-sponsored account that lets parents save money for their child’s education tax free. You can use this money to cover education expenses, including college tuition and fees for qualified apprenticeship programs. In 2019, the U.S. announced that student loan borrowers could use a lifetime limit of $10,000 to pay down student loans for beneficiaries or their siblings.

If the government forgives your student loans or you no longer need the money in your 529 college savings plan for education expenses, there are alternatives. There are five options.

1. Change the beneficiary from your kid to yourself. If you’re a parent who created a 529 savings plan for your child, you can change the beneficiary from your child to yourself. You can then use the money in the account (up to the $10,000 lifetime limit) to pay your own student loan debt. To do this, contact the manager of your 529 college savings plan.

2. Change the beneficiary to another relative. Perhaps you have a cousin, grandkid, or another relative who you want to help out with college. You can do this by transferring your own 529 college savings plan to them. Again, change the beneficiary via the plan manager.

3. Wait until you have grandchildren or other family members who want to go to college. There isn't a deadline for your 529 college savings plan or a requirement to make distributions. You can always sit on the plan and wait for someone else to go to college. The investments in your account can grow on a tax-free basis.

4. Further your own education. Take some classes or get a degree later in life. You can use the 529 college savings plan funds for any education expense, as long as you’re enrolled at least part-time.

5. Withdraw the money. Note that this comes with a hefty tax penalty that will swipe 10 percent from your plan’s total in addition to income taxes. If you have no other use for the money, this may be the best alternative. Additionally, your previously untaxed capital gains may make up for it. To minimize income taxes on 529 withdrawals, consider using your child as the recipient if they are in a lower tax bracket.