CBA Nov.-Dec. 2020
Y O U N G L A W Y E R S J O U R N A L
The SECURE Act: A Hidden Source of Student Debt Relief By Lance Sherry and Robert Schur T he Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which passed in
Historically, 529 Plans allowed a taxpayer to prepay a designated benefi- ciary’s qualified higher education expenses. Higher education expenses previously included only tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution. With changes to the tax code under the Tax Cuts and Jobs Act of 2017, a designated beneficiary may receive up to $10,000 in aggregate distributions on an annual basis for tuition expenses in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. Pub. L. 115-97; 26 U.S.C. § 529(c)(7). With the passage of the SECURE Act, qualified tax-free distributions from 529 Plans were expanded to cover costs asso- ciated with up to $10,000 of qualified student loan repayments – both principal and interest. Pub. L. No. 116-94 § 302 (b) (2019); 26 U.S.C. § 529(c)(9)(B). Note, however, that the pre-existing student loan interest deduction cannot be combined with the new SECURE Act 529 deduction. 26 U.S.C. § 221 (e)(1). Using Illinois as an example, an indi- vidual who files an individual Illinois state income tax return will be able to deduct up to $10,000 per tax year (up to $20,000 for married taxpayers filing a joint Illinois state income tax return) for their total, combined contributions to Illinois based 529 Plans. Do Contributions to 529 college savings and tuition programs qualify as a deduction? , Ill. Department of Revenue, https://www2.illinois.gov/rev/questionsan- danswers/Pages/206.aspx. Although 529 contributions are made from dollars on which federal income tax has been paid, a state income tax deduction is still avail- able. The limit on deductions will apply to CBA RECORD 35 New Deduction and Associated Strategies
debt issue, as of early 2020, 45 million borrowers collectively owe nearly $1.6 trillion in student debt between public and private institutions. Zack Friedman, Student Loan Debt Statistics in 2020: A Record $1.6Trillion , Forbes, Feb. 3, 2020, https://www.forbes.com/sites/zackfried- man/2020/02/03/student-loan-debt- statistics/#2e4635c6281f. Student loan debt is the second-highest consumer debt category in the U.S., behind only mortgage obligations. Roughly 15 million debtors ages 25-34 owe approximately half a tril- lion dollars, with an average of approxi- mately $33,000 of student loan obligations per borrower. However, as of 2016, the average law school graduate has a consider- ably higher debt load of $145,500. Trends in Graduate Student Loan Debt , National Center for Education Statistic, Aug. 8, 2018, https://nces.ed.gov/blogs/nces/ post/trends-in-graduate-student-loan- debt. The cumulative statistics bear out this enormous discrepancy between law gradu- ates and other students: just 7% of borrow- ers owe 35% of the nation’s collective stu- dent loan balance. Andrew F. Haughwout et al., Who Borrows for College—and Who Repays? , Federal Reserve Bank of New York Liberty Street Economics, Oct. 9, 2019, https://libertystreeteconomics. newyorkfed.org/2019/10/who-borrows- for-collegeand-who-repays.html. Further, attorneys hoping to take advan- tage of the Public Service Loan Forgive- ness program might find themselves in a difficult situation since only 1,139 out of 109,932 borrows had their loans forgiven through this program (1% of all appli- cants). Even small cash deployments to 529 plans can help borrowers enjoy appreciable state income tax deductions (assuming the taxpayer is subject to state income tax) and investment gains. The new SECURE Act deduction, while modest, marks a tenta- tive step by Congress to lessen America’s student debt burden.
late 2019, gained much attention for its expansion of opportunities for individuals to increase their retirement savings and make it easier for employers to administer them. Pub. L. No. 116-94 (2019). But buried within the SECURE Act is an over- looked provision that can bring significant student debt relief if creatively deployed. The SECURE Act now allows for qualified distributions from 529 College Savings Plans to cover student loan obligations up to a lifetime limit of $10,000 towards principal and interest. Pub. L. No. 116-94 (2019); § 302(b); 26 U.S.C. § 529(c)(9) (B). Since there are no restrictions on the 529 plan’s owner also being the beneficiary, young attorneys and other professionals might consider utilizing the tax strategy discussed in this article to alleviate some of their student loan obligations. See 26 U.S.C. § 529(c)(9)(B), (e). Earners across the wage spectrum stand to benefit from this change in the law. Higher earners can deploy extra cash to potentially realize both income tax deduc- tions and investment gains. Currently, lower earners, who may have less cash on hand, can elect to take advantage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which suspended accumulation of student loan interest and payments due, likely freeing up cash to take advantage of the strategy outlined in this article. Pub. L. No. 116-136 § 4513 (2019). Thus, borrowers willing to be strategic now have the opportunity to divert funds previously allocated to debt payments to potentially realize both tax deductions and investment gains, which can make a dent in student loan balances whenever payments resume. Background To give a sense of the scope of the student
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