Under federal law, money deposited in a qualified tuition program under section 529 of the internal revenue code (529 plan) grows tax deferred and is withdrawn tax free when used for eligible expenses. In addition to the federal tax benefit, the state provides an incentive for the deposit of money into a 529 plan by offering a state income tax deduction for contributions to a plan.
In 2019, the federal government included paying principal or interest on any qualified education loan, up to a $10,000 lifetime limit per plan beneficiary or sibling of a plan beneficiary, as an eligible expense.
Current law requires the state income tax deduction to be recaptured from the taxpayer if a distribution is not used for listed purposes. The bill specifies that using a 529 plan for paying principal or interest on any qualified education loan, not to exceed $10,000, is also an eligible distribution for purposes of the state income tax deduction for contributions to such 529 plans.
(Note: This summary applies to this bill as introduced.)