Leisl L. Cording, CFP®, CDFA®
Senior Vice President & Financial Advisor
If you have student loans for you or your children, recent developments in the attempt to provide borrowers with some student loan forgiveness have brought about significant changes that impact borrowers' financial planning. There’s also a significant change to the rules regarding what you can do with funds in a 529 college savings fund.
Whether you're a borrower or a parent planning for your children's education, understanding these developments is crucial for making informed financial decisions.
As federal loan interest accrues again starting September 1 and payments resume in October, borrowers should be aware of the shifting landscape.
What To Know Now About Student Loan Forgiveness Now
On June 30, the Supreme Court struck down President Biden's student loan forgiveness plan, which had put a pause on federal student loan interest and payments and offered up to $20,000 in student loan forgiveness to qualifying borrowers. As a result, that potential debt relief is no longer available.
In addition, the pause on the accrual of interest on federal student loans was lifted, and interest began to accrue on those loans beginning on September 1, and many borrowers will need to resume making payments in October. However, the Department of Education has implemented a 12-month "on-ramp" period for financially vulnerable borrowers whose payments will resume in October, providing some relief during this transitional period.
In the wake of the Supreme Court's decision, the Biden administration introduced the Saving on a Valuable Education (SAVE) plan. This income-driven repayment plan aims to make payments more affordable for borrowers. President Biden has also announced a potential path forward for nationwide student loan forgiveness under the Higher Education Act of 1965, but further details have yet to be provided.
The takeaway here is that if you have federal student loans for yourself or your children, plan on making payments beginning in October and assume you'll be paying the entire debt off.
For more information and assistance with federal student loans, borrowers can visit the Federal Student Aid website, their loan servicer's website, or reputable third-party resources. Financial websites like NerdWallet and organizations like the Student Debt Crisis Center offer valuable resources for borrowers seeking guidance on repayment options and loan forgiveness programs.
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Good News for Those With Excess 529 College Fund Savings
Funds in a 529 account can only be used for qualifying educational purposes. Any funds withdrawn for uses other than those purposes are subject to a 10 percent penalty as well as federal income tax. But what if the beneficiary of the account decides not to attend college, or doesn’t end up needing all of the funds for his or her education?
Up until now, options for excess 529 funds were limited to changing beneficiaries, nonqualified distributions, or waiting for future educational needs. But that will change beginning in 2024, thanks to provisions in SECURE 2.0.
As part of the Consolidated Appropriations Act of 2023, 529 account beneficiaries can roll over unused 529 account funds to a Roth IRA, tax-free and without penalties, beginning in 2024. This encourages families to contribute more to their 529 accounts while also allowing for greater retirement savings for those individuals who don’t end up using all of those 529 funds. Another important factor is that high earners, typically restricted from Roth IRAs due to income limits, can take advantage of this opportunity without those limitations.
There are rules and limitations for this new 529-to-Roth rollover opportunity though:
- Recipient Roth IRA must be in the 529 beneficiary's name.
- The 529 plan must be open for over 15 years.
- Rollover amounts cannot include recent Roth IRA contributions or earnings.
- A lifetime maximum of $35,000 applies to rollovers.
- Roth IRA contribution limits still apply, requiring staggered rollovers within annual limits.
And, there are some uncertainties about the 15-year rule.
While the new provision stipulates that the 529 plan must be open for at least 15 years in order to roll over to a Roth IRA, it's unclear whether changing a 529 beneficiary restarts that 15-year clock.
So for example, if you had a 529 plan for 20 years but rolled it over to someone else – say your child – 5 years ago, it’s unclear whether that child would be eligible to roll it over to a Roth IRA immediately, or if they would have to wait another 10 years.
This has implications for strategic planning. For instance, you could:
- Start a 529 account to initiate the 15-year clock before having a child.
- Change beneficiaries to potentially exceed the $35,000 rollover limit.
- Address changes in beneficiaries based on educational needs or expense disparities.
The ambiguity surrounding the 15-year rule may be addressed by guidance from Congress or the IRS. However, due to past delays and uncertainties, resolution might not come before the rule's 2024 implementation. While awaiting the introduction of 529-to-Roth IRA rollovers, understanding the new rule's implications and limitations is vital for effective financial planning.
If you’d like to learn more about our Plan Well, Invest Well, Live Well™ strategic process and how we can put it to work to help you create an investment portfolio tailored to meet your goals and reflect your values, contact us at (860) 928-2341 or request a complimentary consultation.
Presented by Senior Vice President, Financial Advisor Leisl L. Cording CFP®, CDFA®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084, 860.928.2341. http://www.whzwealth.com These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your financial advisor. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice.