When we talk to parents about setting up a 529 plan for their kids, it's usually a no brainer. It's also usually followed by the statement, "I wish someone had done this for me." Which got us thinking, wouldn't it be great if you could use a 529 to pay off student debt? At this stage, sadly you can't. The good news is, we believe that will likely be changing soon.
529 plans are set up to help parents ensure a more secure financial future for their college grads. As the economy shifts, tuition prices rise, and student debt increases; what it takes to secure a financial future changes, and as such, 529 plans need to evolve.
Earlier this year, The House Ways and Means Committee unanimously passed the
Secure Act. If this bill is ultimately passed and becomes law, it will expand the scope of a 529 plan, allowing you to use the balance to cover costs associated with homeschooling, apprenticeships, and, you guessed it, a portion of student debt.
Let's begin by taking a step backward. You might be wondering, "Why would I have student debt if I have a 529 plan?" 529 plans don't guarantee zero debt at graduation. They are simply the most effective way to save for college - meaning you'll get more bang for your buck by putting your college savings into a 529 plan, than any other savings account. It is possible to save enough to totally cover the cost of college using a 529 plan, but the reality is that for most of us, there will still be a need to supplement those savings with a student loan.
Fast forward, and let's assume that the bill passes and that you can use a 529 plan to pay off your student debt. What would that mean?
Best case scenario, you'll be charged an average of 6% or less interest on your outstanding student debt. 529 plans, however, earn an average compounding return of 6%. Unlike with your debt, when it comes to savings, it's a really good thing that your interest earns interest! Long story short, if you are able to pay off your student debt with funds from your 529 plan, you could essentially cancel out your interest - paying off your loans much quicker, using less of your hard-earned moolah.
So why isn't this a thing yet? Well, if you are able to pay off student loans with tax-free earnings - given the monumental size of the outstanding debt in this country - that's a LOT of money not going into Uncle Sam's pockets. Add to that, that historically 529 plans have been seen as a tax haven for the 1%, you'll see why there's been little incentive for the government to expand the scope of their benefits.
Luckily, times they are a-changin'; and with platforms, like Scholar Raise, that democratize financial planning by making it accessible for those who can't afford a financial advisor (#ShamelessPlug), the 529 plan's tax benefits are increasingly available to those who need it the most. That, and the fact that our outstanding student debt has reached crisis levels - finally politicians are at least beginning to have the right conversations about how to mitigate this problem.
We predict that the bill Secure Act bill will be passed, and that they will expand the amount that you're allowed to use on student debt - currently it's capped at $10,000. Paying off student loans faster will free up disposable income that just hasn't been available to most millennials until now. This will allow them to invest in the stock market, purchase property and start businesses. This, essentially achieves the end the government is looking for: it turbocharges ability for a generation to dig themselves out of crippling debt, and subsequently improving every aspect of the economy.
