How This New Bill Could Help You Pay Off Your Student Loans

529 plan rules

In January, two state legislators introduced a new bill that would change 529 plan rules. The proposed law would give users with 529 accounts more flexibility, reports CNBC, allowing them to use their plans to pay off student loan debt.

What is a 529 plan?

A 529 plan is a savings account designed especially for college funds. It’s a tax-advantaged investment option that encourages people to plan for their children’s future education.

But under current 529 plan rules, if you take out money to pay off your student loans — rather than using it to pay for a child’s current school expenses — the government fines you a 10 percent penalty and taxes you on the withdrawn amount.

That provision can mean sacrificing a lot of your savings to pay off debt, so using a 529 to pay off student loans is normally not a good idea.

According to CNBC, there were $242.7 billion in 529 savings accounts nationwide as of 2016.

The 529 and ABLE Account Improvement Act of 2017

Congresswoman Lynn Jenkins and Congressman Ron Kind introduced H.R. 529, the “529 and ABLE Account Improvement Act of 2017.” The bipartisan bill would expand the role of 529 plans and help combat student loan debt.

ABLE accounts are similar to 529 plans, but family members can use them for children with disabilities.

What the bill means for employers

The new bill was designed to encourage employers to contribute to 529 plans and ABLE accounts like they do retirement accounts.

“This bill will improve the [529] program by encouraging employers to contribute to 529 plans and removing penalties for using the funds to pay for loans,” said Congresswoman Jenkins in a joint press release.

To qualify for employer incentives, the contribution must go to a bank account with an employee or an employee’s family member as the account holder. Additionally, employers have to make their contributions through payroll deductions.

As an added incentive, the bill would give tax credits to small businesses who participate. They would get a tax credit for the expenses associated with setting up a 529 employee program and establishing payroll deductions.

How the new 529 plan rules would affect individuals

The bill would also give significant benefits to individuals. It would remove the penalties that currently exist for using 529 plans to pay off student debt.

“By creating incentives for parents to invest in tax-free 529 college savings plans, like an employer matching program and the ability to use the money to pay for educational tools, we are leveling the playing field for hard-working Wisconsin parents and students,” said Congressman Kind in the press release.

And it would give investors more flexibility. Right now, you can only make investment changes twice a year. The new bill would allow you to tweak your investments more often, so you can take advantage of market changes.

Next steps

Jenkins and Kind formally introduced the bill in the House and it will be referred to a committee. Once the House has assigned it to a committee, it will be on that group’s calendar.

From there, the committee — likely the Education Workforce Committee — will debate the merits of the bill. Some members may or may not choose to make changes to the proposed bill.

Committee members will then vote to accept or reject the changes made during the working sessions. If there are any changes, the committee may decide to amend the bill. But if the committee decides to proceed with the bill, they will send it onto either a subcommittee or to the House Floor.

When the bill goes to the House Floor, members of the House will debate the bill and then will vote on whether or not to proceed with it. If the House votes to pass the bill, it then goes to the Senate where it undergoes a similar voting process.

Finally, if it passes both the House and the Senate, it goes to the President for his signature, inaction, or veto. Once the President signs the bill, it becomes law. If he decides not to take any action, it becomes law after 10 days. And if he decides to veto the bill, it can go back to Congress for their override, if they deem it necessary.

This process can be very lengthy, so even with bipartisan support, the 529 and ABLE Improvement Act of 2017 could take months to be processed, if it does get approved.

529 plans and student loans

While it may take time for the House to hear the 529 bill, it’s introduction shows that the government is taking student loan debt seriously and is considering different actions to relieve the burden on individuals. Allowing investors to use 529 plans to pay off student loan debt without penalty is a significant change that could be very beneficial to many people.

For more information about potential changes to the student loan system, see what President Trumps’s radical approach to student debt means for borrowers and taxpayers.

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