Hey Money Minder,
So, my daughter just graduated college and racked up some federal loans, but most of them didn’t have interest yet. At the same time, I had a 529 plan with around $25K, almost the same amount as her debt.
But here’s the kicker – I found out I can only use $10K from the 529 to pay off her loans, and apparently, I should’ve been using the 529 while she was still in school.
So, now I’m brainstorming some options. I could transfer a big chunk of the money to myself or her, pay off the debt, and hope no one notices. Or I could transfer the money to her brother, who’s still in school, and then transfer it to myself to cover her debt.
I know I could convert the money to an IRA, but I really need to get rid of this debt. I might take my time paying it off though, just in case student loan forgiveness becomes a thing again.
My main worry is – am I crossing a legal line by using the 529 money to pay off her debt now that she’s done with school? And would I get in trouble with the IRS?
Thanks for all the suggestions about Roth, but I really need to focus on paying off this debt before it starts accruing interest.
Look, I know this may not have been the smartest move, but at the time, it felt like the right choice. And with the talk of student loan forgiveness, I wanted to hold off on paying until that situation cleared up. Now, I can’t delay any longer.
Just to be clear, I wasn’t intentionally trying to break the law. I was just wondering if these rules were more like “don’t murder” or “don’t go over 55 mph.”
Thanks for all the advice. I’ll start by paying off the $10K, cover her housing expenses, and give the rest to her brother.
Take care,
Response from THE MONEY MINDER:
Hello There,
Congratulations on your daughter’s college graduation! It’s clear that you are facing a complex financial situation with both the federal loans and the 529 plan. It’s great that you are considering different options to tackle this debt responsibly.
It’s important to address the concerns you have raised regarding the use of the 529 funds to pay off your daughter’s student loans. While I can understand the temptation to use the funds in a way that may not align with their original purpose, it’s crucial to stay within legal boundaries and ensure compliance with IRS regulations.
Based on the information provided, it seems like the best course of action would be to pay off the $10K directly towards your daughter’s student loan debt, as allowed by the 529 plan. This will help reduce the overall debt burden and start the process of repayment.
In addition, you could consider transferring any remaining funds to your daughter’s brother for his college expenses, as long as it aligns with the guidelines of the 529 plan. This way, you are still utilizing the funds for educational purposes within your family.
It’s commendable that you are approaching this situation thoughtfully and seeking advice on how to proceed. By taking a realistic and practical approach, you can navigate this financial challenge effectively and make progress towards managing the debt responsibly.
Remember, it’s always best to consult with a financial advisor or tax professional to ensure that you are making informed decisions and staying compliant with relevant regulations. Thank you for sharing your concerns, and best of luck as you work through this process.
Farewell,
THE MONEY MINDER
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