It’s August, and thoughts often turn to back-to-school. Whatever that looks like. For those of us with students at home (and at home, and at home, and at home) or in college (also, possibly at home, darn it), paying tuition bills may also be top of mind.
In the last year, there have been two legislative acts (SECURE and CARES) that have affected the rules of 529 college savings accounts and paying for college in general. Mostly, the changes have allowed more access to the money saved in these vehicles. Here is a quick summary, with commentary from the author.
SECURE Act (passed in late 2019)
Rule: Up to $10,000 can be used from a 529 plan to repay student loans. Plus up to $10,000 each can be used to repay loans for the beneficiary’s siblings. Commentary: An improvement over the old rules, to be sure. But why this $10,000 per kid limit? How about just letting people use 529 money to repay loans of any amount for the original beneficiary. Why make it so complicated? Plus, it benefits people with more kids disproportionately. I could go on…
Rule: Funds in 529 plans can be used to pay for apprenticeships. The apprenticeships must be registered with the Department of Labor. Your “Apprenticeship to Upkeep The Family Yard” doesn’t count. Commentary: About time! My biggest fear is to go into old age and never be able to find a plumber or electrician because we’ve pressured all of our kids to get liberal arts degrees at the tune of $120,000. Not that there is anything wrong with an English degree, so don’t send me your nasty e-mails.
Rule: Colleges can continue paying Federal Work-Study students for up to a year if the student’s employer or college is closed due to the pandemic. The amount paid is based on future work study hours scheduled, not past averages. Commentary: Sounds good – be sure and ask your school about this if you are on a work study plan.
Rule: Federal student loan payments held by the US Department of Education can be stopped until September 30, 2020 and interest is waived during the suspension. Comment: A nice start, but not all loans are federal, and this is a short-term suspension. Hopefully, something more robust will come along in future aid packages.
Rule: If you are receiving employer-paid student loan repayment assistance, you don’t need to count that assistance for your income taxes. This applies to payments received through 2020. The maximum amount is $5,250/year. Commentary: Not life changing, but we’ll take what we can get.
And last, a nice Gotcha, courtesy of the government.
If you received a refund from your child’s college for Spring 2020 and you had used a 529 withdrawal to originally pay that bill, you may be subject to income tax and a 10% penalty on that withdrawal. You would have had 60 days to return the 529 money from the date of receiving the refund to avoid the tax hit.
This is wrong on so many levels. First, it certainly was under the radar. Second, if you had to haul your kid home from school unexpectedly, there were many surprise costs associated with that, so it’s not like the refund left you swimming in extra money. Third, I feel terrible that I’m just now discovering this and telling you about it. It’s probably too late if you are in this situation because 60 days from your refund has likely passed.
Please discuss this with your CPA to make sure you are not getting crosswise with the IRS.
College will look different for our students for the next year at least. Let’s hope the payment options keep up with the changes.