personal finance

There might be a new way to pay off your student loans — here's the catch

The most recent proposal is unlikely to deliver relief to struggling borrowers, said Alan Collinge, founder of the advocacy group Student Loan Justice.

“This is no solution to the student loan crisis,” Collinge said. “Students who use 529 plans tend to come from wealthier families.”

Indeed, research by the Federal Reserve found that households with the accounts have significantly higher income and wealth than those without them. Half of families with the plans make more than $150,000 a year.

And the accounts remain relatively uncommon. Fewer than 1 in 5 children under the age of 18 have a 529 plan, according to

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Still, Kantrowitz sees benefits to the legislation.

For one, he said the change will increase awareness about the accounts. Despite the financial benefits of using the plans, research has found that less than one-third of people understand their purpose.

The advantages of the accounts are hard to overstate. Studies show that children with the savings plans are more likely to attend college. And if you start to contribute to a plan at your son or daughter’s birth, about a third of your savings goal could come from investment earnings alone, according to calculations by Kantrowitz.

Another beneficiary of the expansion could be grandparents, Kantrowitz said.

A parent’s 529 plan has a minimal impact on their child’s financial aid eligibility, which determines how much in grants and student loans they receive. It’s calculated by looking at a household’s income and assets. Yet a grandparents’ accounts can have a serious impact, reducing what a college offers a student. To work around that drawback, Kantrowitz said, grandparents could now wait to use their 529 plans until their grandchildren are out of school and in debt.

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