College Funding in Action: 529 Withdrawals and Student Loans Moratorium

Kirk Kreikemeier |

This is the first year we are not moving one of our children back to college.  While I will miss walking around campus during drop-off and visiting all the cool libraries, I will not miss managing the college finances.  I was very glad we saved over the years so funds were readily available in each kid’s 529 account.  But the process still needed to be managed, as well as keeping up with the latest regulation on student loans.

I will use these fond memories to discuss two timely topics related to college funding:

  1. Withdrawing 529 funds to pay “qualified education expenses”
  2. End of student loan payment moratorium on 9/1/2022


#1 – Withdrawing Funds from 529 Savings Plan

This is the fun part of the 529 savings process – having the funds available to cover the bills.  Great job on sacrificing other spending over the years to build up these savings and make this part less stressful.

Here are some common questions with bullet point answers.  See my recent blog post on 529 plans.

What expenses can be reimbursed from a 529 Savings Plan?

  • Sources:  IRS Publication 970 or 529 Plan Document
  • Tuition, fees, books, supplies and equipment required by the school
  • Room and board (if enrolled at least half time); includes living off-campus, provided it is less than room/board rate school uses for cost of attendance
  • Purchase of computers and peripheral equipment, software and internet access provided software related to academic needs (sorry gamers…)
  • No more than $10,000 to pay off student loans for 529 beneficiary or siblings (verify your state allows - Illinois does)
  • NOT ALLOWED:  college application fees, transportation, insurance, sports/club/social fees, interior decorator (I guess it’s a thing!) and resulting furniture/decorations.
  • NOTE:  if have a 529 PrePaid Plan that ONLY COVERS TUITION.

Where are the funds sent from the 529 Plan?

  • You request a withdrawal from 529 Plan (be sure to select “qualified expense”) and enter where you want funds to go; a few choices:
  • Directly to school for tuition and room/board if on campus
  • Directly to 529 beneficiary (the student) for any reimbursement
  • To a 529 owner (that’s you) and then owner sends off to necessary party
  • I personally had an ACH connection to my checking account where all funds were sent, then I paid necessary recipients from there
  • NOTE:  if have a 529 PrePaid Plan those funds must go directly to school

When should you withdraw from the 529 Plan?

  • Must be done in the same calendar (not academic year) year that expense is incurred
  • It can be after you paid the bill or reimbursed someone, but be sure same year
  • I personally don’t keep every receipt; but do keep enough records, statements and emails to support why paid the amounts
  • Allow enough time for the selling and transfer of funds before bill is due
  • I would assume at least a week in advance if sending to own checking
    • Day 1 - sell the funds in 529 before 3pm Central Time
    • Day 2 – cash available from fund sale and can be withdrawn from 529
    • Day 3 – ACH needs extra day for funds to credit checking account
    • Day 4 – push the funds out via ACH to the entity reimbursing
    • Day 5 – entity receives funds
    • Day 6 or 7 – life happens and there is delay above so do early!
  • Yes can go directly to school and need fewer days but I liked a single pipe in/out of 529 and all expenses found in my checking account; your call
  • NOTE:  if have a 529 PrePaid Plan check with plan; if using to cover out-of-state school likely requires even more time… and a lower factor applied to funds!

Any investment or savings considerations while doing the withdrawals?

  • Unlike retirement savings which may be years away and withdrawals stretched over 30+ years, college time horizon is shorter (kids grow quickly!) and all funds typically depleted over 4 years
  • Be sure the investment risk taking in a 529 plan is reduced as college age approaches – either through “age-based” portfolios or your rebalancing
  • Since only can make investment changes twice per year, direct any withdrawal from funds need to reduce for allocation reasons (n/a for age-based)
  • Recalculate required savings vs. expected bills given more clarity on amounts and adjust savings requirements for last few years

Any other considerations?

  • Run all qualified expenses through the 529 plan if have state tax deduction for contributions (if pay with outside funds, less contributed to 529)
    • ADDED NOTE:  One exception is if Modified Adjusted Gross Income (before deductions; close to AGI) is under $80k for single or $160k MFJ (partial credit up to $90k/$180k).  Then consider paying up to $4,000 of tuition out of pocket to potentially maximize the American Opportunity Tax Credit worth up to $2,500 per child.  Talk to your accountant.
  • There is only one owner on a 529 plan; can’t be jointly owned; choose (or change) the owner to the person who will be handling the finances since 529 provider can only speak to owner
  • You specify the 529 beneficiary; when withdraw funds needs to be “qualified expenses” for that beneficiary; yes, you can change beneficiaries but need to do so before withdrawing funds for them (except for student loan pay off of a sibling)
  • My focus here is college funding; also other qualified expenses including up apprenticeship programs and up to $10k/yr for K-12 education (verify state allows; Illinois does not)
  • What if money left over?  Can change beneficiary up to first cousins, keep for grandchildren, graduate school, etc
  • If do withdraw for non-qualified expenses; recognize investment gains only (not full principal) as income plus 10% Fed tax penalty; state will recapture past related deduction
  • If student got scholarship and as a result don’t need all funds, can withdraw that portion without 10% penalty but have same tax consequences


#2 – End of Student Loan Payment Moratorium on 9/1/2022

Ok, not a smooth segue but a timely topic related to college funding.  For those with federally held student loans, you are likely aware back in March 2020 after COVID hit, the Trump Administration put a pause on interest accruals and payments required for federal student loans.  It was initially set to expire 9/30/2020 but got extended, first to 12/31/2020 then 1/31/2021 as the economy recovered from COVID shutdown impacts.

When the Biden Administration took office they extended the moratorium to 9/30/2021 and there was talk of potential $10,000 debt forgiveness.  Despite the economic recovery from COVID, the moratorium was extended again to 5/1/2022 and then again to where we are today – expiring in two weeks on 9/1/2022.

There is still time for another extension but historically an announcement would have been made by now.  Congress also just passed a large Inflation Reduction Act that may not have much to do with reducing inflation near-term.  However, extending the student loan moratorium definitely would have the opposite effect of reducing inflation and given inflation concerns and November elections, I do not believe there will be an extension or any forgiveness.

So get your budget ready to resume payments.  Be aware that during this long moratorium, even though no interest was being accrued, the same principal balance outstanding remains with the same monthly payments as before, unless you continued to pay some debt down.  Some may have chose to pay down other higher interest debt or increased tax-advantaged savings, which is a great strategy, knowing they need to switch back to student loan debt when resumes.  Those who increased their spending / lifestyle without any other adjustments will need to tighten the belt back to where it was as payments resume on the debt you incurred.  Here is a link for related information from the US Dept of Education.

The table below provides the monthly required payment for a 10-year amortization schedule for different loan amounts and interest rates.  I also show the approximate interest savings this moratorium provided that you hopefully used for your financial advantage.  But to be clear, it was only the interest charges that were not accrued during this time; the principal balance you had on 3/30/2020 is still there for you to begin paying down again.


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Enjoy the packing, college road trip, finding that cool library, and yes those good-byes (it is an exciting time for them – embrace it!).  Then when you get back home you’ll be ready to take care of the bills!


Posted by Kirk, a fee-only financial advisor who looks at your complete financial picture through the lens of a multi-disciplined, credentialed professional.