Using 529 To Reimburse Expenses You Paid For With a Federal Loan

[Delmar2]

I'm the account owner and beneficiary of my 529. In 2023, I had $30,000 in Qualified Higher Education Expenses (tuition + fees). But $12,000 of those expenses were paid for via a federal loan that was disbursed directly to my school.

My question is: how much can I withdraw my 529 as a qualified withdrawal (no tax, no penalty)?

1. Can I only withdraw $18k, i.e., $30k minus the $12k loan amount?

2. Or can I withdraw the full $30k, even though $12k of my "expenses" were paid for directly by a loan?

3. Or could I even withdraw $40k – $30k in expenses plus $10k to pay off loan principle (subject to the $10k lifetime limit on loan payments from a 529)?

I hope that all makes sense. I cannot find guidance on this question anywhere. Thanks so much.

[tagteam]

I will page @Hal_Al 

[Hal_Al · Accepted solution]

Q. How much can I withdraw my 529 as a qualified withdrawal (no tax, no penalty)?

A. Simple answer: $30,000; the full amount of the qualified expenses paid.  The fact that you also borrowed money is not relevant. 

Q. Could I even withdraw $40k – $30k in expenses plus $10k to pay off loan principle?

A. Yes. So long as there was no double dipping.  To be a qualified loan (for a 529 distribution) you must have paid qualified educational expenses  with it (at some time, not necessarily this year). You can't claim the same expenses for both the loan and the $30K 529 distribution.  But, room and board are also qualified expenses, even if the student lived off campus or at home (the student must be half time or more). 

[Delmar2]

Thank you, and I hope you won't mind a further question:

Let's say the loan was for $20,000, but I only pay off $5k using 529 money. As far as double-dipping is concerned, do I need to show that:

1. $5k of the loan money was used for qualified higher education expenses that were NOT also claimed as expenses for 529 purposes

OR do I need to show that:

2. The entire $20k loan was used for qualified higher education expenses that were NOT also claimed as expenses for 529 purposes (even though I'm only using 529 to pay off $5k of the $20k total).

Hope that makes sense.

[Hal_Al · Accepted solution]

Q. Let's say the loan was for $20,000, but I only pay off $5k using 529 money. As far as double-dipping is concerned, do I only  need to show that $5k of the loan money was used for qualified higher education expenses that were NOT also claimed as expenses for 529 purposes?

A. Yes.  

[m67j66]

Where is this information captured in TT?  What section (s)?

[Hal_Al · Accepted solution]

Q. Where is this information captured in TT?  What section (s)?

A. In TurboTax (TT), enter at:

Federal Taxes Tab (Personal for H&B version)

Deductions & Credits

-Scroll down to:

--Education

  --ESA and 529 Qualified Tuition Programs (1099-Q)

The interview will eventually present the loan payment question. There is no short cut, you have to go thru the 1099-Q interview.