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.

Refunds may result in a tax headache

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.

Student Loan Relief

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:

  • Since no interest will accrue over the next six months, there is no benefit to making payments on FEDERAL loans that aren’t required (even if you are still employed and able to pay).

  • Borrowers that are still employed will have options on what to do with this “windfall”.

      • Use the scheduled payment amounts to create/increase a “rainy day fund”
      • If an adequate “rainy day fund” for this environment is already in place, consider strategic loan payments, e.g. make extra payments on private loans that are still accruing interest, make a principal payment on a high rate FEDERAL balance before the 0% rate period ends or pay off accrued interest to keep it from compounding into the future.

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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This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.