What you should know about 529 plans and 0% interest for student loans

WASHINGTON » The COVID-19 pandemic has made financial planning for higher education even harder.

Parents and students are trying to figure out college costs for next fall — assuming schools even reopen like normal. There’s the question of what to do with money taken from a taxadvantaged 529 education savings plan. And should you still make payments on a student loan even if you don’t have to?

Here’s what you should know about 529 plans and student loans during the coronavirus crisis.

Should I continue making student loan payments during the forbearance period?

The Coronavirus Aid, Relief, and Economic Security Act or Cares Act automatically suspended payments for most people with federal student loans until Sept. 30.

During this payment “pause,” interest on federal loans owned by the government is effectively reset to zero percent.

If you’ve lost your job or been furloughed, you may not have a choice. You have to take the payment break.

But you might want to consider continuing to make payments if you can afford to do so. Keep in mind that every penny of your payment goes straight to reducing your principal, which will save you money in the end.

However, if you qualify for the Public Service Loan Forgiveness (PSLF) Program, or you’re close to loan forgiveness for an income-based payment plan, you could use the payment break to cover other expenses or build your savings.

By the way, if you meet all the conditions under the PSLF program, you will receive credit toward loan forgiveness for any payments that are waived due to the Cares Act. It would be as if you made the payments.

What is the possible tax ramification for college refunds of money taken from 529 plans?

Colleges that sent students home from campuses have been issuing refunds for tuition, fees and room and board. For some families, it’s a welcome injection of money.

But the refunds have created concern for people who paid college expenses with money withdrawn from a 529 college savings plans, which allows contributions to grow tax-free. If the funds are used for qualified educational expenses, earnings are generally not taxed.

However, if money from a 529 plan is not used for qualified education expenses, referred to as a “non-qualified” distribution,