People with student debt may soon have another way to pay their monthly bills. What’s unclear is how much of a help that new method will be.
The House Ways and Means Committee earlier this month unanimously passed the Secure Act, which would expand 529 accounts to cover costs beyond college to those associated with apprenticeships, home schooling — and up to $10,000 in student debt.
The bill now heads to the full House. The Senate Finance Committee introduced a companion bill that is expected to pass with bipartisan support, after which it will go up to the president.
The investment accounts, which are named after Section 529 of the Internal Revenue Code, are offered through states to encourage people to save for college. Withdrawals put toward qualifying education expenses are tax free.
Under the new provision, borrowers who have an account could use it to cover the principal and interest on their loans. The changes would apply to account distributions starting from January of 2019.
“Anything that provides families with more flexibility in how they use 529 plans would be beneficial,” said Mark Kantrowitz, publisher of SavingForCollege.com.
The list of uses for which the accounts can be tapped has been growing: K-12 private school tuition was added as an eligible expense in the latest overhaul to the federal tax code.
The most recent proposal is unlikely to deliver relief to struggling borrowers, said Alan Collinge, founder of the advocacy group Student Loan Justice.
“This is no solution to the student loan crisis,” Collinge said. “Students who use 529 plans tend to come from wealthier families.”
Indeed, research by the Federal Reserve found that households with the accounts have significantly higher income and wealth than those without them. Half of families with the plans make more than $150,000 a year.
And the accounts remain relatively uncommon. Fewer than 1 in 5 children under the age of 18 have a 529 plan, according to SavingForCollege.com.
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Still, Kantrowitz sees benefits to the legislation.
For one, he said the change will increase awareness about the accounts. Despite the financial benefits of using the plans, research has found that less than one-third of people understand their purpose.
The advantages of the accounts are hard to overstate. Studies show that children with the savings plans are more likely to attend college. And if you start to contribute to a plan at your son or daughter’s birth, about a third of your savings goal could come from investment earnings alone, according to calculations by Kantrowitz.
Another beneficiary of the expansion could be grandparents, Kantrowitz said.
A parent’s 529 plan has a minimal impact on their child’s financial aid eligibility, which determines how much in grants and student loans they receive. It’s calculated by looking at a household’s income and assets. Yet a grandparents’ accounts can have a serious impact, reducing what a college offers a student. To work around that drawback, Kantrowitz said, grandparents could now wait to use their 529 plans until their grandchildren are out of school and in debt.
However, that assumes a family doesn’t need every penny in their 529 plans to get their child through college, said Steven Bloom, the director of government relations at the American Council on Education.
Most people deplete their savings by the time their child graduates and so there would be no money left over for them to cover their student debt anyway, Bloom said.
One year at a nonprofit, four-year private college — including tuition, room and board — currently costs $48,510, while the average 529 account has just $24,153.
Even the better-off, Bloom said, are likely to respond to the change with indifference.
“If you’re wealthy enough to have a lot in your 529,” he added, “you’re probably not going to have student loans.”