Can the funds in a 529 (College Savings Plan) be used without penalty to pay student or parent college loans?

Answer 1

I don't think so. The purpose of the plan is to actually lessen the need for loans so paying past ones doesn't fit the bill.

Note the penalties and taxes are only due on the growth, not the original principal invested.

Also the tax advantages of the plan are pretty much lost on a student who is already in school, or very close to going. It makes more sense to use the Hope and Lifetime tax credits (which you cannot use if you take money from a Coverdale or 529 account).

However, those credits are also only applicable to qualified expenses incurred within the tax year, not past expenses.