Repayment of Student Loans
The CARES Act expanded the definition of expenses available to qualify for the $5,250 excludable employer provided educational assistance to include employer payments of the employee’s student loan debt. This special allowance is only available for payments made between March 27, 2020, through December 31, 2025 (Taxpayer Certainty and Disaster Tax Relief Act of 2020)
Tip
The employee isn’t allowed to claim the above-the-line student loan interest deduction for interest that the employer paid. So, in some cases it may be advantageous for the employer to designate their payment as going to principal only so the employee can claim the interest deduction.
Sec 529 Plan
Effective for distributions after 2018, distributions from a 529 plan of up to $10,000–a lifetime limit–may be used to pay the principal and interest on qualified higher education loans of the designated beneficiary or a sibling of the designated beneficiary. (Sec 529(c)(9) as added by the SECURE Act) To prevent double-dipping, Sec 529 plan distributions used to pay interest on the education loan cannot be used for the above-the-line deduction for student loan interest. (Sec 221(e)(1))
Example – George took a distribution of $5,000 from his Sec 529 plan to repay part of his student loan debt. He had never used 529 plan funds before to make a student loan payment. According to Form 1099-Q that he received from the 529 plan, $800 of the distribution was attributable to earnings. Form 1098-E from the lender indicates that $1,200 of the $5,000 loan payment went to interest owed. During the year George did not take any other Sec 529 distributions and didn’t make any other student loan payments. The amount of student loan interest eligible for the above-the line deduction is computed as follows : 1. Amount from Form 1098-E, line 1 (total student loan interest paid) $1,200 2. Amount from Form 1099-Q, line 2 (earnings portion of Sec 529 distribution) 800
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3. Line 1 less line 2 – student loan interest eligible for above-the-line deduction 400