Asking for a Friend - Should I use the 529 funds I saved first, or save those accounts for later?

May 16, 2022

Q: Should I use the 529 funds I saved first, or save those accounts for later?

A: As always, it depends, but here are some things to consider.

  • Non-qualified 529 plan distributions - earnings are subject to income tax and a 10% penalty (sometimes local taxes too), so you want to make sure you use the 529 funds for college.

  • However, you may still want to use the available student loans (Stafford) to fund some of the costs of college, because once the semester passes, you can’t go back on the loan amount you waived; you can now repay $10,000 of the student loan with the 529, so this might make the dollars stretch.

  • But understand, loans come with fees, so using the 529 plan can help you avoid those potentially avoiding the cost of origination fees:

    • Direct - 1.057%

    • PLUS - 4.228%

  • And of course, potentially avoiding interest on loans:

    • Direct - 3.73% - 10/01/2021 - 10/01/2022

    • Graduate - 5.28% - 10/01/2021 - 10/01/2022

    • PLUS - 6.28% - 10/01/2021 - 10/01/2022

Note to Grandparents: this is the time to discuss how these contributions affect financial aid

For more information, see When and How to Use 529 Funds - on our resource page


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