529 Savings Plan Student Loan Repayment Limit Doubles to $20,000, Starting in 2026

This bill is a straightforward change to the tax code that offers a significant win for anyone who has both a 529 college savings account and outstanding student debt. Currently, you can withdraw up to a lifetime limit of $10,000 from a 529 account tax-free to pay down qualified student loans. This legislation doubles that limit, allowing account holders to use up to $20,000 in 529 funds for student loan repayment without incurring federal income tax on the withdrawal. However, don’t rush to make that payment just yet—the new $20,000 limit only kicks in for tax years beginning after December 31, 2025.

The $10,000 Bump: More Tax-Free Debt Relief

Think of the 529 plan as a tax-advantaged savings vehicle primarily for education expenses like tuition and books. The ability to use these funds for student loan repayment was a relatively recent addition to the tax code. This bill simply makes that benefit twice as useful. For a young professional—say, a software developer or a skilled tradesperson—who had a 529 account opened for them years ago, this is real money. If you have $20,000 left in student loans and $20,000 in your 529 account, you can now wipe out that debt using your tax-advantaged savings, saving potentially thousands of dollars in taxes compared to paying the loans off with regular income.

Why This Matters for the Busy Middle Class

This change is all about financial flexibility and maximizing existing savings. Most people aged 25-45 are juggling mortgages, childcare costs, and the pressure of student loan payments. If you have a 529 plan with money left over—maybe your child got a scholarship, or you saved more than you needed for your own degree—this provision lets you redirect that money toward debt rather than letting it sit or taking a taxable withdrawal. It’s a practical way to chip away at the student debt crisis using money that was already earmarked for education but wasn't fully utilized. The money you save on taxes can go straight back into your budget, whether it’s for groceries, retirement savings, or just paying the electric bill.

The Catch: You Have to Wait

While the benefit is clear, the implementation is delayed. The new $20,000 cap doesn't apply until the 2026 tax year. This means if you are planning to use 529 funds for loan repayment right now, you are still bound by the original $10,000 lifetime limit. The delay is something to keep in mind for financial planning; if you are close to hitting the current $10,000 limit, you might want to hold off on further 529-funded loan payments until January 1, 2026, to take advantage of the doubled cap. This bill doesn't change any of the rules about who qualifies for a 529 or what a 'qualified' student loan is; it just increases the dollar amount of the existing tax break.