May 7, 2020
The Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent notices issued by the Internal Revenue Service (IRS) have several educational provisions that we wanted to highlight for you. As the economic impact of coronavirus (COVID-19) continues, the CARES Act aims to alleviate additional debt burdens. In this blog, we will discuss the student loan provisions and the 529 refund recontribution rules for those who have received a refund from a higher educational institution.
Student Loan Provisions
Key provisions providing relief for student loan borrowers are outlined below:
- No payments are required on federal student loans owned by the U.S. Department of Education until September 30, 2020. This includes Direct Loans (which includes PLUS Loans), as well as Federal Perkins Loans and Federal Family Education Loan (FFEL) Program loans owned by the Department of Education. Unfortunately, private student loans and federal student loans not owned by the U.S. Department of Education are not covered under the CARES Act.
- No interest will be applied during the six-month suspension ending on September 30, 2020. No action is required on the part of the borrower to take advantage of this zero percent interest rate and suspension of payments. If the borrower makes a payment between March 13, 2020 and September 30, 2020, the borrower can contact the loan servicer to request a refund.
- Once all interest accrued prior to March 13, 2020 is paid, any voluntary payments made during this suspension period will be applied toward the principal of the loan. Borrowers also have the option of making partial payments.
- For credit reporting purposes, any payment that has been suspended is treated as if the borrower made a regularly scheduled payment.
- For those who are under the Public Service Loan Forgiveness (PSLF) program, any missed payments will still count toward forgiveness if you were on a qualifying repayment plan prior to March 13, 2020. This means that there is no need to make extra payments for debts that would otherwise be forgiven.
- Employers can contribute up to $5,250 toward an employee’s student debt through December 31, 2020 without any tax consequences for the employee.
529 Refund Recontribution Rules
Higher educational institutions have been forced to close dining and residence halls during the spring semester while also shifting to solely online instruction due to the spread of the coronavirus. In many cases, the schools are offering refunds for expenses that were paid from a 529 plan (this also includes prepaid tuition plans and Coverdell education savings accounts). If a college/university issues a refund of qualified education expenses (tuition and fees, books and supplies, computers and internet access, room and board if enrolled at least half-time, special needs equipment) that were paid from a 529 plan distribution, you can return the money, or recontribute it, within 60 days of receiving the refund to avoid paying tax or a penalty on the refund. Under temporary IRS guidance issued as a result of the coronavirus, if that 60-day period ends on or after April 1, 2020 and before July 15, 2020, then the recontribution can be made any time before the later of July 15, 2020 or 60 days after the refund date.
Specific Details to Know About the Recontribution
Keep the following details1 in mind about making the recontribution:
- The recontributed amount cannot be bigger than the refunded amount because any excess contribution will be considered a new contributed amount. For example, if you received a refund of $5,000, you could not then turn around and make a $6,000 recontribution because the extra $1,000 would be considered a new contribution;
- The recontribution must be made to a 529 plan for the same beneficiary but it does not need to be the same 529 plan from which it was distributed if that beneficiary has multiple 529 accounts;
- If the refunded amount is not recontributed within 60 days of receipt except for the IRS coronavirus exception already noted, it will be considered a non-qualified distribution; therefore, the earnings portion is subject to income taxation and a 10% penalty along with a potential recapture of state income tax breaks attributable to the non-qualified distribution;
- You should make note of the specific rules that your state’s 529 plan requires about processing the recontribution;
- The account owner should keep track of all the records showing the date of the refund and then its recontribution into the 529 plan; and
- Finally, make copies of all the documents for your records and consider sending the documents registered or certified mail to easily prove that you met the recontribution time frame.
If you have any questions about how the educational provisions of the CARES Act can affect your personal financial plan, please contact a Ronald Blue Trust advisor by calling 800.987.2987 or emailing [email protected]. You can also click here to read additional articles related to the CARES Act.