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it to pay for a child’s current school expenses — the government fines you a 10 percent penalty and taxes you on the withdrawn amount.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.
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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 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% 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 July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.
5 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. 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 0.16% effective August 10, 2020.