On December 20, 2019, the SECURE Act (“Setting Every Community Up for Retirement Enhancement”) was signed into law. Besides making serious changes to inherited IRA and required minimum distribution provisions, the Act expands the use of 529 Plans to cover registered apprenticeship costs and student loan repayment. As mentioned in our most recent articles about 529 Plans, such plans allow individuals to contribute to another individual’s future education. More specifically, these plans pay for the beneficiary’s “qualified education expenses.”
Before the SECURE Act, such expenses did not include student loan debt, and thus 529 funds could not be used toward repayment of the beneficiary’s student loans. Under the SECURE Act, 529 funds may now be used to repay up to $10,000.00 of the beneficiary’s student debt. In addition, the Act allows an additional $10,000.00 to be used to repay the beneficiary’s sibling’s student loan debt.
The SECURE Act’s expansion of 529 plans also allows grandparents to contribute to a grandchild’s college funds without affecting the student’s financial aid eligibility. Generally, distributions from a grandparent-owned 529 plan are treated as untaxed student income on a student’s FAFSA and thus can negatively affect the financial aid a student receives. Now, this effect can be avoided if the grandparent waits until January 1st of the grandchild’s sophomore year of college to take a distribution from the 529 plan or waits until the student graduates to pay down their student loans.
Lastly, the SECURE Act allows 529 plans to be used to pay for apprenticeships, which provide on-the-job training to prepare workers for a particular career. To be considered a “qualified education expense,” the apprenticeship program must be registered and certified with the Secretary of Labor. If it is, 529 plan funds may be used to pay for costs associated with the program, such as fees, books, equipment and other supplies.