Can You Use a 529 Plan to Pay Student Loans? What the rules actually say

If your family has 529 left in savings for college and you’re staring at student loan debt, there is a legal way to connect the two, but the rules have limits that most people don’t know about.

The SECURE Act of 2019 made student loan repayment a qualified expense for 529 education savings plans. That means you can withdraw money from a 529 account to pay off student loans without having to pay the usual 10% penalty or federal income tax on your earnings. But there is a hard cap – and a few pitfalls that can cost you money if you’re not careful.

The lifetime limit of $10,000

Below 26 USC § 529each beneficiary can receive maximum $10,000 in lifetime 529 distributions for the repayment of student loans. That is not per year; it is total, for all 529 accounts, forever.

There is one useful extension: you can also use maximum $10,000 per sibling of the beneficiary. So if a 529 account is set up for one child and their sibling also has a student loan, the account owner can change the beneficiary and make a separate $10,000 distribution for the sibling.

Which loans are eligible?

Both federal and private student loans are eligible for 529 reimbursement under the IRS Qualified Rules for Education Expenses. The loans must be “qualified education loans” as defined in the tax code – which covers most legitimate student loans used to pay for the costs of higher education.

The tax traps to keep an eye on

You lose the interest deduction for student loans

Here’s where people get surprised: If you use 529 funds to pay student loan interest, that interest amount is deducted from what you can claim about the deduction of student debt. The IRS reduces your eligible deduction by the income portion of the 529 distribution used for loan repayment.

For most people, this is a small trade-off: the 529 tax-free withdrawal usually saves more than the deduction would. But it’s worth calculating both sides if you’re close to the $2,500 deduction limit.

Your state may not agree with the IRS

The SECURE Act changed the federal definition of qualified expenses. But not all states have adopted this the new rules. In those states, the income portion of a 529 distribution used for student loan repayment could be subject to state income tax – and possibly a state-level penalty.

New 529 Rules You Need to Know (2025-2026)

The 529 landscape has changed significantly, more than just student loans:

529-to-Roth IRA Rollover (SECURE 2.0 Act)

Beginning in 2024, beneficiaries will be able to roll unused 529 funds into a Roth IRA – until $35,000 lifetimesubject to annual Roth contribution limits ($7,500 in 2026). The 529 account must have been open for at least 15 years and contributions from the past five years are not eligible.

One Big Beautiful Bill Act (signed July 2025)

This legislation expanded qualified 529 expenses for elementary and secondary education, increasing costs annual withdrawal limit for primary and secondary education of $10,000 to $20,000 per student starting Jan. 1, 2026. It also added new qualifying expenses such as tutoring, standardized testing costs and career credentialing programs. The $10,000 repayment limit for student loans remains unchanged.

How to actually do it

• Confirm that your 529 plan allows student loan distributions (most do, but check)
• Check to see if your state considers it a qualified distribution
• Request a withdrawal from your 529 plan, specifying “student loan repayment” as the goal
• Make the payment to your loan servicer (some plans pay directly, others send you a check)
• Keep records: you will need documentation showing that the withdrawal at tax time was used to repay the loan

$10,000 won’t solve a $50,000 problem

Let’s be honest about what this is: $10,000 helps, but it’s not a debt solution for someone with a serious student loan balance. The average federal student loan borrower owes about $37,000. If you’re struggling with student debt, this 529 option is a small help – not the answer.

(Source: US News & World Report)

Frequently asked questions

Can I Use a 529 Plan to Pay Off Student Loans?

Yes. The SECURE Act of 2019 added student loan repayment as a qualified 529 expense. You can withdraw up to $10,000 per beneficiary (lifetime limit) to pay principal or interest on qualified education loans without federal tax or the 10% penalty.

Does the $10,000 limit apply per year or per lifetime?

It’s a lifetime limit: $10,000 total for all 529 accounts for each beneficiary. Once you have used the full $10,000 toward student loan repayment, no additional 529 distributions for that purpose will qualify as tax-free for that borrower.

Can I use 529 funds for a sibling’s student loans?

Yes. The $10,000 lifetime limit applies separately to each beneficiary sibling. So if the original beneficiary and their sibling each have a student loan, up to $10,000 can be used for each, but you may need to change the 529 beneficiary first.

Does using 529 funds for student loans affect my tax deduction?

It’s possible. The income portion of a 529 distribution used for student loan repayment reduces the amount of interest eligible for the student loan interest deduction (up to $2,500 per year). The tradeoff is usually in favor of the tax-free 529 withdrawal, but you need to calculate both.

Do all states treat 529 student loan payments as tax-free?

No. Although the federal government considers it a qualified distribution, some states have not complied with the changes in the SECURE Act. In those states, the income portion of the benefit may be subject to state income taxes. Check your state’s 529 plan rules before withdrawing.