This is Samantha from Nebraska. I’ve got a question regarding paying off student loans with a 529 savings account. My husband and I have been married about a year and a half and are both in our mid 20s. I was fortunate enough to graduate college debt free and have about $13,000 left in a 529 savings account. My husband has about $17,000 in student loans. We are currently living the DIY Money lifestyle and will have our remaining auto loans paid off by September 2020, freeing up about $1,500/month. My question is should we use the $13,000 from my 529 account to pay down his student loans, or should we leave it in the 529 account and just apply the additional $1,500/month toward the student loans and continue the debt snowball? We do plan on having kids in the future, but obviously don’t know if they will choose to attend college or not. We are from a farming community and there are plenty of job opportunities that don’t require college degrees. I have been told that we would be able to withdraw from my 529 to use on student loans without penalty (I would just have to change beneficiaries I believe). What are your thoughts?
Samantha, first off, thanks for the question it’s a good one. You’re right, the recently approved SECURE Act has some odds and ends tucked in that make it more than just a change in the required minimum distribution age. Now, you have the ability to use up to $10,000 towards student loans. You are also correct that you’d just have to change the beneficiary of your 529 to your husband, which you could do at any time and, voila, $10,000 of his $17,000 student loan is gone.
While I can’t give you specific advice, because I don’t know your entire situation, I can tell you that, in the general scenario you laid out, I’m all for paying down the loan as much as possible, as quickly as possible. Furthermore, as you may already know and one might assume, I’m not a big fan of 529s. We did a podcast on this subject which you can find HERE to check out for yourself.
It sounds like you’re not sold on the specific need to ‘save for college’ for your children, and you can explore other options such as custodial accounts, Uniform Gifts to Minors Accounts or Coverdell Education Savings Accounts. Currently, with the expanded 529 uses, I don’t see any reason for their existence. Most importantly, you mention that you live in a community where a college education may not even be required; and, therefore, you are open to the idea that a person may not need to attend college to become financially successful.
I think your line of reasoning is appropriate, and I would then make sure your focus is on personal debt reduction and wealth creation in your own household. I personally believe one of the best things we can do for our family is to be financially secure and not bring home the stress and frustration of money problems, which inevitably infect many family situations and scenarios. In addition, you’ll still have around $3k socked away in the 529 that can’t be used for those student loans; so, by default, you’ll still have a starter fund regardless.
It sounds like you’re on the DIY Money path and, with the additional funds from car payments in September, you should have this student loan knocked out by early 2021 and, hopefully, well on your way to being debt free!
Bravo to you and your persistence. Hopefully this helped confirm what, I believe, you were already thinking and may have already done!
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