With so much information being shared at this time, we wanted to make sure you did not miss two very important issues related to educational funding that apply to anyone who 1) paid tuition for the spring 2020 semester out of a 529 account or 2) has student loan debt. Feel free to forward this to others in your life whom it may apply to.
Many colleges and some private schools have had to issue refunds for the spring semester that was cut short. If any refunds of amounts paid from a 529 account are not returned to the same student’s 529 account, the refund will be considered a non-qualified distribution from the 529 and will be subject to income tax and a 10% penalty. If you haven’t seen a refund, confirm with the student that they haven’t seen one in their bank account as that account may be the one on file with the school.
The calculation of the tax impact is beyond the scope of this article and we recommend that you consult with your tax accountant to confirm what you should do with the refund. Even though the refunded amounts are likely to be small, the tax headaches are large and complex so most people will want to return the funds to the 529 account. Typically, the IRS allows funds to be returned to the 529 account for the exact amount of the refund if done within 60 days of receipt. Due to the COVID-19 pandemic, the IRS will waive the tax and penalty on any refund the taxpayer received after Feb 1, 2020 as long as it is re-deposited before July 15, 2020. Please review your 529 account’s procedures for depositing a refund and don’t hesitate to reach out to your Modera wealth manager with any questions.
As part of the CARES Act, all FEDERAL student loans were reduced to 0% interest and no payments are due from March to September of 2020. One thing to note is that the $0 payments for those 6 months will still count towards the 120 consecutive monthly payments requirement to be considered for the Public Service Loan Forgiveness (PSLF) program. In addition, it’s important to keep in mind that the waiver of interest and payments only applies to FEDERAL loans. Most private student loans and state-run student loan programs are not covered, so do not assume this applies to your loan until you confirm it on the www.studentaid.gov website.
This relief is going to provide a great deal of help to many at such a difficult time. Financial planning around student loans is a complex specialty. If the borrower has significant balances and/or may be eligible for the PSLF program (i.e. young doctor or nurse working at a non-profit hospital), you may want to consult with a specialist in this area; your Modera wealth manager can also help you identify resources.
Here are some general guidelines to consider for borrowers:
Please consult with your Modera wealth manager should you have any questions about the tuition refunds or student federal loan relief as a result of COVID-19.
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