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it to pay for a child’s current school expenses — the government fines you a 10 percent penalty and taxes you on the withdrawn amount.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  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.
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.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.46% – 6.97%1||Undergrad & Graduate|
|2.57% – 8.44%4||Undergrad & Graduate|
|3.05% – 6.47%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|