One education cost 529 plans can't pay

March 21, 2008

The expenses for our son's junior year in college exceeded the amount left in his 529 plan, so he took out a $10,000 student loan. Then my father gifted $11,000 to the plan. Can our son use that money to pay off the loan?

The expenses for our son's junior year in college exceeded the amount left in his 529 plan, so he took out a $10,000 student loan. Then my father gifted $11,000 to the plan. Can our son use that money to pay off the loan?

No. Repaying a student loan isn't considered a qualified education expense, so if he uses the money that way it will be subject to federal and state tax (if any), as well as a 10 percent penalty. Instead, apply your dad's gift to the costs for your son's senior year.