At first blush, this sounds like it might be double-dipping. But let's take a look at the new IRS rules.

As pointed out in another question, in the U.S. we can now use a Qualified Tuition Program (QTP, e.g. a Section 529 Plan) to pay student loans as a qualified education expense - up to a lifetime maximum of $10,000 per person and provided your state accepts the new rules (mine does). The newly released IRS Publication 970 for the 2019 tax year provides some good information, but it glosses over certain details. I even called the IRS and tried to ask for clarification, and the rep admitted that she couldn't find any answers because it's still too new. I'll periodically try to get the IRS to conjure up an official answer, but I'm hoping that someone can either shoot holes in my below scenario or provide additional support for it being valid.

From the 2019 Publication 970:

You can’t deduct as interest on a student loan any amount paid from a distribution of earnings made from a qualified tuition program (QTP) after 2018 to the extent the earnings are treated as tax free because they were used to pay student loan interest.

So student loan interest paid from the earnings portion of a QTP distribution cannot also be used for the student loan interest deduction – i.e. "No Double Benefit Allowed". But it seems (from a 1099-Q) that the earnings portion on a short-term turnaround would be relatively low (~10% of the distribution, in my case of having a small seed balance). I interpret this to mean that my total student loan interest paid (on the Student Loan Interest Deduction Worksheet can be calculated as the smallest of the following:

  • $2500 (maximum allowed)
  • reported paid student loan interest (from 1098-E Box 1)
  • total student loan payments minus QTP distribution earnings (1099-Q Box 2) used to pay student loans

Determining the last number requires a bit of spreadsheet-fu but is doable to be able to prove that I'm not double-dipping per tax law. This makes the following scenario plausible:

  • Make a $333 QTP contribution, to count as a state income tax deduction ($4000 max per person for my state / 12 months)
  • Make a $500 student loan payment, where $300 applies to interest and $200 applies to principal
  • Take a $333 QTP distribution several days later, very little of which will be earnings
  • Include the $300 interest portion in the following tax season's student loan interest deduction
  • Claim the full $2500 student loan interest deduction from federal income tax (and state, they start with my federal AGI)
  • Claim the full $4000 QTP contribution deduction from state income tax
  • Not get fined for tax evasion – I’m just saving money by legally dancing the tax dance using all the numbers that are reported to the IRS and the state

I realize that there will be little-to-no gains from having the money in the 529 plan for such a short amount of time (and some risk of loss), and this is isn't at all how 529 plans were originally designed to be used. But I'm already using exactly this 529-as-a-proxy to effectively deduct my daughter's private school tuition from state income tax, after 529 plans were expanded a couple years ago to also allow K-12 tuition. I keep a small balance in a conservative-growth 529 account in her name (which has accumulated some small growth as a bonus), monthly contribute the amount of her tuition, and a week later withdraw the same amount. The account also has an aggressive-growth partition for her future college savings, but that's not relevant to the above discussion.

Perhaps this is legal but likely to trigger a tax audit, which might not be worth the ~$100 it would gain me on my state income tax return.

I'd also like to know whether QTPs can be used to pay for refinanced/consolidated student loans, but I'll ask that question in a separate thread.

Edit: I just got my first 1099-Q from using the 529 account last year on my daughter's tuition (mentioned above), and it looks like I misunderstood the earnings keyword. It doesn't apply to the entire 529 distribution but specifically just the gained/earned value from what sits in the account. I updated the above scenario accordingly.

Edit: After more than an hour on the phone with an IRS rep, I at least got her to acknowledge that the new Publication 970 may not be sufficiently clear. Further, she had a newly-updated tool that included a vague comment about QTP distributions with no indication of what value to subtract from what. The call basically ended with “I’ll recommend a clarification at our next meeting. Thank you for the feedback, but I can’t make a ruling on tax law.”

  • oh god I made the original question and I did not expect to get this far into the weeds of tax law. I guess this is why people hire accountants.
    – Erin B
    Commented Jan 23, 2020 at 20:58

1 Answer 1


I would be surprised that there is a threat of a tax audit. I have done something similar, though not with student loan interest.

Determining the last number requires a bit of spreadsheet-fu

That isn't unusual for 1098-T and 1099-Q calculations.

I have found that even Turbo-Tax has problems with the calculations, due to the fact that the school my children went to (and many other schools) put on the 1098-T the billed amount of the Spring semester because the IRS allows them to. That means that the numbers on the tax forms submitted will never match the numbers on the 1098-T.

In addition the 1099-Q, if you have the money sent to the account owner so that tuition can be reimbursed after it is paid, instead of being sent directly to the school; will combine all the students distributions onto one form. This is made even more complex because each child will have a principal value and an interest value, and the IRS wants all numbers rounded to the dollar. One number must be a lie by $1 in order to make all the numbers total correctly.

I always set aside one night just to process all the college related numbers, to make sure that I am not over-claiming or under-claiming.

The motion of money through a 529 just for the state tax deduction is something I did with my last child. An extra year of school was needed and 5.75% of a years tuition was nothing to sneeze at.

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