I recently wrote a few blogs regarding the different types of student loans and repayment options, as well as some important things to consider when taking out loans for your education. Given the current pandemic, the CARES Act has impacted student loans, and colleges have provided tuition reimbursements due to a switch from classroom settings to an online classroom. I want to highlight some important points for those who have monthly student loan payments, as well as those who may have received a tuition refund, which was funded with money from a 529 plan.
Students Loan Payments
- The CARES Act, which was recently passed by Congress and signed into legislation, has suspended federal student loan payments through September 30th, 2020.
- Not only have loan payments been suspended, but certain federal loans will also have 0% interest rates through September 30th, 2020.
- Here is the list of federal student loans that are owned by the U.S. Department of Education and qualify for the 0% interest rate:
- Defaulted and Nondefaulted – Direct loans, FFEL Program loans, and Federal Perkins loans
- Defaulted HEAL loans
- It is important to note that some federal student loans under FFEL are not owned by the U.S. Department of Education and are not eligible for the 0% interest benefit.
- For those who are still looking to make student loan payments on a monthly basis, you are able to do so.
- Suspension of payments is automatic. You do not need to qualify or take any action for it to be implemented.
- Private student loans – For those who have private student loans, it would be recommended that you contact your lender to confirm what options are available, as the suspended payments and 0% interest may not be applicable.
529 Plans and Tuition Reimbursements:
- Many students who have paid for room and board may receive refunds from the college they are attending, which could lead to an unexpected tax bill.
- If you have used a 529 plan to pay for educational expenses, it is important that money is redeposited back into the 529 plan within 60 days for the same beneficiary.
- Account owners have 60 days from the date of refund to deposit the money back into the 529 plan. Failure to do so could lead to the distribution being considered a non-qualified taxable withdrawal.
- Failure to redeposit within 60 days could also lead to the earnings portion of the non-qualified distribution being taxed and also hit with a 10% penalty.
- A student is able to apply the distribution to the next semester and avoid taxes and penalties as long as the semester is in the same tax year. This could be a risky option due to the unclear plans for the fall semester.
- It is suggested that the account owners talk to their 529 plan providers to make sure all documentation and transactional details are covered and executed properly to avoid taxes and penalties.
If you have additional questions regarding 529 plans and/or student loans, please feel free to contact a financial advisor in our office for assistance.
Take care and stay safe!
There is no guarantee that the plan will grow to cover education expenses. In addition, depending upon the laws of your home state or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 college savings plans may be available only if you invest in the home state's 529 college savings plan. Any state-based benefit offered with respect to a particular 529 college savings plan should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances and also may wish to contact your home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state's 529 college savings plan. You may also go to www.collegesavings.org for more information.