Family
Beyond the credits: 529s, student loans, forgiveness
What a 529 plan can pay for now, the student loan interest deduction, and when a forgiven loan becomes income. The education credits get the attention; these three rules move more money for many families.
By Charles Trautman, EA
The Tax Shop · Lone Tree, Colorado · Reviewed October 14, 2026
The education credits get the attention, but three other rules move more money for many families: the 529 savings plan, which has become far more flexible; the student loan interest deduction; and whether a forgiven loan is taxed. Many states add a fourth, a state deduction or credit for putting money into a 529 plan, and it is missed constantly because the federal return gives nothing for it, so nobody asks. Whether yours does is in the state side of this article.
| Item | Single | Joint |
|---|---|---|
| 529 for K–12 tuition, per student per year | $20,000 | $20,000 |
| 529 for student loan payments, lifetime per borrower | $10,000 | $10,000 |
| 529-to-Roth rollover, lifetime | $35,000 | $35,000 |
| Student loan interest deduction | $2,500 | $2,500 |
| Student loan interest phase-out (modified AGI) | $85,000 – $100,000 | $175,000 – $205,000 |
| Employer loan or tuition help, tax-free | $5,250 | $5,250 |
What a 529 plan pays for
A 529 plan is a state-sponsored investment account for education. Money goes in after tax, grows untaxed, and comes out tax-free when it pays qualified expenses, and that list has grown.
| Expense | Rule |
|---|---|
| College or trade school tuition and required fees | Yes, at any eligible school, including many abroad |
| Books, supplies, computers, software and internet | Yes, if used by the student while enrolled |
| Room and board | Yes, if enrolled at least half-time; off campus, limited to the school’s published allowance |
| K–12 tuition | Up to $20,000 a year per student from 2026 ($10,000 for 2025) |
| K–12 books, tutoring, testing fees and educational therapies | Yes, since July 4, 2025, within the same yearly limit |
| Registered apprenticeships and recognized credential programs | Yes; credential and licensing programs added July 2025 |
| Student loan payments | Up to $10,000 lifetime per borrower, plus $10,000 for each sibling |
| Rollover to the beneficiary’s Roth IRA | Up to $35,000 lifetime, if the 529 has been open 15 years, within the yearly IRA limit, and not from contributions of the last five years (verify) |
| Transportation, health insurance, sports fees | No |
Withdraw in the same calendar year you pay the expense. Form 1099-Q goes to whoever receives the money: paying the school or the student directly keeps it off the parents’ return, which matters if any part turns out to be taxable.
Worked example: three generations, one freshman
A college freshman’s first-year bill is $30,000. Parents (joint, 22% bracket) contribute $20,000 to her 529 account in August and withdraw it for the fall and spring bills; grandparents contribute $8,000 to the same account; the student pays $2,000 from a summer job.
| Parents | Grandparents | |
|---|---|---|
| 529 contribution | $20,000 | $8,000 |
| Federal effect | None; but $4,000 of tuition paid outside the 529 earns the $2,500 American Opportunity Credit | None (no gift tax return needed under $19,000 each) |
| Family’s federal tax benefit, year one | $2,500 | |
The parents should pay $4,000 of tuition from their checking account rather than from the 529, so that the credit is not lost; the 529 pays the other $26,000 including room and board. If your state gives a deduction for 529 contributions, the grandparents’ share belongs on their own return; nobody asks them about it unless they mention the gift.
Withdrawals that go wrong
When 529 money is not used for qualified expenses, the earnings part of the withdrawal is taxed and hit with a 10% penalty. Your original contributions come back tax-free. The same dollars cannot count for both the American Opportunity Credit and a tax-free 529 withdrawal; the plan that usually wins is $4,000 of tuition from other money for the full $2,500 credit, with the 529 covering everything else. If the student gets a scholarship, you can withdraw up to the scholarship amount without the 10% penalty, though the earnings are still taxed. Leftover money can go to a sibling, cousin, parent or yourself without tax, be kept for grandchildren, or go into the beneficiary’s Roth IRA over several years.
The student loan interest deduction
Up to $2,500 a year of interest paid on a qualified student loan is deductible, and it does not require itemizing. For 2026 the deduction phases out between $85,000 and $100,000 of modified AGI for single filers and $175,000 and $205,000 for joint filers. The loan servicer reports the interest on Form 1098-E. Only the person legally obligated on the loan, who actually paid the interest, takes the deduction; married couples must file jointly; and you cannot take it if someone can claim you as a dependent.
Parents paying a child’s loans. If the loan is in the child’s name, the parent cannot deduct it, but the IRS treats the payment as a gift to the child followed by the child’s payment, so the child can deduct it if not a dependent (verify). Parent PLUS loans in the parent’s name are deductible by the parent. Refinanced loans still qualify, as long as the new loan only refinanced qualified student loans.
Forgiveness and employer help
Taxable again for some. A forgiven debt is normally income. A temporary rule made student loan forgiveness tax-free through 2025. From 2026, the balance forgiven at the end of an income-driven repayment plan is taxable income again, federally, unless the borrower is insolvent at the time; your state may tax it too. A borrower whose $40,000 balance is written off can owe tax on $40,000 in a single year, on income that never arrived as cash. The year of forgiveness is known in advance, which is the year to plan around.
Still tax-free. Public Service Loan Forgiveness, teacher loan forgiveness and other work-based programs, and discharges for death or total and permanent disability, which the 2025 law made permanent.
Employer student loan payments. An employer can pay up to $5,250 a year toward your student loans, or your tuition, tax-free, under a written plan. The 2025 law made this permanent, and the limit rises with inflation after 2026. It never shows up in your income, and it is worth asking an employer about.
Scholarships
Scholarships are tax-free when they pay tuition, required fees, books and supplies for a degree student. The part used for room, board or travel is taxable income to the student, and so is a scholarship that requires teaching or research work in return. A counterintuitive move: sometimes a family comes out ahead by treating part of a scholarship as paying room and board, making that part taxable to the student, often at 0% or 10%, so that tuition paid with family money qualifies for the $2,500 credit. It takes careful figures, and the award letter has to allow it, but it can be worth more than $1,000 a year.
Behind the scenes
A 529 withdrawal arrives on a Form 1099-Q showing the gross amount and the earnings, and nothing about what it paid for. The software treats the earnings as taxable until someone proves otherwise. A preparer matches each withdrawal to a tuition bill, a dorm charge or a loan payment, in the same calendar year, and sets aside the tuition that will instead earn the education credit. A December withdrawal for a January bill is the mistake that generates a letter. The other question asked every year is who else put money into the plan, because in a state with a 529 deduction, a grandparent’s deduction belongs on the grandparent’s return and the grandparent’s preparer has no way to know about it.
The New Hampshire side
New Hampshire gives no deduction or credit for 529 contributions, because it has no income tax to deduct them from; the UNIQUE College Investing Plan, the state’s Fidelity-run 529, grows free of a state tax that does not exist, and the federal rules on this page are the whole picture. Student loan forgiveness that becomes taxable federally is not taxed by New Hampshire. The state’s own education money moves outside the tax system: the Education Freedom Account program for K-12 families (verify current eligibility) and the Education Tax Credit, which rewards businesses, not families, for funding scholarships.
What to bring your preparer
- Form 1099-Q for each 529 withdrawal, and the bills it paid, matched by calendar year
- 529 contribution confirmations for every contributor in the family, with the beneficiary’s name
- Form 1098-E from each loan servicer, and whose name the loan is in
- Scholarship award letters, showing what the money may be used for
- Any employer student loan or tuition assistance, and whether it appears on the W-2
- If a loan was forgiven: the servicer’s notice and the balance written off, and a list of your assets and debts on that date, for the insolvency test
Questions people ask
Can I use our 529 for my child’s private high school?
Federally, yes: tuition up to $20,000 a year from 2026, plus books, tutoring and testing fees. Check the state side of this article before a K–12 withdrawal, since a state that gave a deduction for the contribution may not treat the withdrawal as qualified.
Our son got a full scholarship. What happens to his 529?
You can withdraw up to the scholarship amount without the 10% penalty; only the earnings are taxed. Or keep it for graduate school, change the beneficiary, or roll some into his Roth IRA over time.
I pay my daughter’s student loans. Can I deduct the interest?
Not if the loan is in her name. If she is not your dependent, she can deduct it as though she paid it herself. Parent PLUS loans in your name are deductible by you, within the income limits.
My loans will be forgiven under an income-driven plan next year. Do I owe tax?
For forgiveness after 2025, generally yes, unless you are insolvent at the time (debts greater than assets). Public Service Loan Forgiveness is still tax-free. The year is known in advance, so an installment agreement or setting money aside can be arranged before the 1099-C arrives.
Does a grandparent’s 529 gift count against the gift tax exclusion?
Yes, as a gift to the beneficiary, within the $19,000 per person annual exclusion; a special election lets a contributor front-load five years’ worth, $95,000, at once. Below $19,000 no gift tax return is needed.
Withdraw in the same calendar year you pay the bill
A December 529 withdrawal for a January tuition bill is the mistake that generates a letter. Match each withdrawal to a bill in the same year, and keep the bursar statement with the 1099-Q.
Written by Charles Trautman, EA, editor · Need to Know Tax, Lone Tree, Colorado
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