Questions about Student Loan Strategies

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By Mark Kantrowitz

May 21, 2020

During our webinar about Student Loans 101 (Borrowing), participants asked dozens of questions. Here are the answers to questions on borrowing student loans.

With the drop in 529 values, is it a good idea to take a student loan now, and pay the loan back once the 529 has recovered some?

There is a limit to how much you can use a 529 plan to repay student loans.

A qualified distribution from a 529 plan may be used to repay up to $10,000 in student loans. This is a lifetime limit per borrower.

Thus, the 529 plan may be used to repay up to $10,000 each in student loans for the beneficiary and the beneficiary’s siblings. By changing the beneficiary to the parent, the 529 plan may also be used to repay up to $10,000 in parent loans.

Any amounts beyond $10,000 will be considered a non-qualified distribution. A non-qualified distribution is subject to income tax and a 10% tax penalty on the earnings portion of the distribution, plus possible recapture of state income tax breaks that are attributable to the distribution.

The student’s parents are divorced and the custodial parent has refused to do the FAFSA. As a grandparent, I have been paying all college costs. The student is now 21 and a rising college senior. Is there an advantage to student loans in helping her build her credit score, knowing that I will pay off?

Payments made on federal and private student loans are reported to the three major credit bureaus. On-time payment of the student loans will help the borrower build a good credit history.

However, when the borrower applies for a credit card, auto loan or mortgage, the loan application will ask for information about the borrower’s income and duration of employment. If the borrower’s income is insufficient for them to have been making the loan payments on their own, this will be evident in the borrower’s debt-to-income ratio.

Do you have any student loan calculator app recommendations? has released ten student loan calculators, including loan payment calculators, loan prepayment calculators, loan comparison calculators, refinancing calculators and four income-driven repayment calculators. These calculators are implemented with a responsive user interface that adapts to smartphones, tablets and desktop computers.

A good place to start:

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