Distributions from 529 Plans for Student Loan Repayment Limited

Beneficiaries of 529 plans may withdraw up to $10,000 to pay their student loan debt. The funds may also be used to pay student loan debt of siblings. The dollar limit is for a lifetime. The IRS has made it clear that withdrawals in excess of this dollar limit is a taxable distribution and subject to a 10% penalty (IRS INFO 2021-0024).

Note: Assets in a 529 plan account owned by a grandparent are not counted for a grandchild’s FAFSA when applying for student aid. Accounts owned by parents are a “parent asset” on FAFSA; assets above the “asset protection allowance” (which depends on the older parent’s age) reduces a student aid package up to 5.64% of the account’s value.