Paying student loans from a 529 in 2026: $10,000 per borrower, once

One allowance per person who owes

The loan rule was added to section 529 by Public Law 116-94 in December 2019. It treats as a qualified expense the principal or interest paid on a qualified education loan of the beneficiary or of a sibling, up to $10,000 per individual, reduced by everything already treated that way in earlier years (26 U.S.C. 529(c)(9)). Three features follow from that wording.

First, it is a lifetime figure. A graduate who uses $4,000 this year has $6,000 left for the rest of their life, whatever the number of accounts or plans involved. Second, the count follows the borrower, not the account: two grandparents who each own a 529 for the same graduate share one allowance. Third, the law sets no yearly ceiling, so the whole $10,000 can go in a single payment.

Brothers and sisters

An account can pay the loans of the beneficiary's sibling without a change of beneficiary. IRS Publication 970 counts brothers, sisters, stepbrothers and stepsisters, and it charges those payments to the sibling's own allowance. Consider a family with one account left after the younger child received a scholarship. The account can send up to $10,000 to the older sister's loans and another $10,000 to the younger child's own loans, if he has any. If the older sister later receives payments from a 529 of her own, the earlier transfer has already used her allowance.

Cousins, parents and spouses are not siblings for this rule. A parent who borrowed in their own name, for example through a federal parent loan, is a different borrower. The rule speaks of loans of the beneficiary or of a sibling; to use the allowance for a parent's loan, the parent has to become the beneficiary of the account first, which a change of beneficiary within the family allows.

No double benefit on the interest

The student loan interest deduction and the 529 cannot cover the same dollar. Publication 970 says you cannot deduct as student loan interest any amount paid from tax-free 529 earnings. In practice, if the graduate pays $1,800 of interest in a year and $1,800 of 529 money paid it, none of that interest is deductible on the federal return. A graduate whose income is inside the deduction's range may prefer to point the 529 at principal and pay the interest from wages, keeping the deduction. That only works if the payments are kept apart in the records, so the plan's withdrawal should match a principal payment of the same amount and date.

What your state does with it

A state income tax begins from federal income, so a state that wrote nothing special follows the federal answer. Several states did write something. States that treat loan payments as qualified on their own return, as read on their revenue department or plan site: Alabama, Arizona, Arkansas, California, Connecticut, District of Columbia, Georgia, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, Wisconsin. States that do not: Colorado, Indiana, Minnesota. No clear text at the read date: Delaware, Hawaii, Massachusetts, New Jersey, Ohio, West Virginia.

Where the state does not follow, two costs appear. The earnings part of the payment is taxed as state income, and deductions taken when the money went in may be added back. A Colorado graduate at $70,000 of income who sends $4,000 of deducted contributions to a loan servicer could owe about $176 at the Colorado rate of 4.40 %, on top of state tax on the earnings. The recapture page shows the add-back rules state by state.

Loans or another use?

Loan repayment is often the second-best exit for money left in an account after graduation. It turns $10,000 of savings into debt paid down, with no tax in states that follow, but it does not grow. The alternatives depend on the size of the balance and the family. A beneficiary with earned income and an account open for 15 years or more can move up to $35,000 to a Roth IRA over time (529 to Roth IRA). A younger sibling still in high school may need the money for tuition. A plain withdrawal of $6,000 with 30 % earnings would cost about $576 in federal tax and the additional 10 % for a single graduate at $70,000, before any state tax. The leftover money page lines the options up.

How to make the payment

Whoever receives the withdrawal, keep the servicer's statement showing the payment, the loan number and the split between principal and interest, and make sure the withdrawal and the payment fall in the same calendar year. The plan's Form 1099-Q reports the withdrawal but not what it paid for, so the proof is yours to keep. Only a qualified education loan in the sense of section 221(d) of the tax code counts, which is the same definition the interest deduction uses.