Qualifying Student Loan Repayments

[austin3515]

I answedred my own question but I thought this was interesting enough to share:

Participant takes a loan from the 401(k) Plan to pay for the higher education expenses of their dependent or themselves or their spouse.  Why does this not qualify as a "Qualified Student Loan"?

Answer:  SECURE inddicates that the following definition applies to qualifying student loans:

221(d)(1) Qualified education loan

The term "qualified education loan" means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses—

(A) which are incurred on behalf of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,

(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and

(C) which are attributable to education furnished during a period during which the recipient was an eligible student.

Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term "qualified education loan" shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72(p)(4)) or under any contract referred to in section 72(p)(5).

 

[Paul I]

Plans that allow QSLPs should communicate clearly the differences between a Qualified Education Loan (QEL) versus a plan loan, and repayment of a QEL using QSLPs versus repayment of a plan loan.

In the case of a parent wishing to take a loan to pay for education expenses, here are some points to consider:

• The participant has to be the person obligated to repay the QEL, and the participant is obligated to repay a plan loan.
• QELs are based on need as determined by the lender, plan loans generally are not.
• The amount of the QEL is based on need, plan loans are subject to limits based on the size of the vested account and loan history.
• The participant may have a QEL for each year of education expenses with payments deferred until the student no longer is in school, while repayments on plan loans begin immediately.
• Repayments of the QEL (i.e., QSLPs) often can be extended over 20 years or more, while plan loan repayments generally cannot exceed 5 years.
• QELs are not considered in the calculation of the plan limit on the amount of loan available.

I'm sure there are more points to be made and our BL colleagues may have some suggestions.