Can a 529 Plan distribution be used to pay off a student loan taken out in the current school year (but the prior calendar year) and still be considered a qualified distribution (not subject to taxes and penalty)?
No. Student loans are not included in the definition of a qualified higher education expense for 529 college savings plans.
Within a single academic year, it may be possible to use a 529 plan distribution to pay college costs and then ask the school to return the excess loan funds to the lender. This is generally limited to the current payment period (academic term) and within a short period of the loan being disbursed. In such a circumstance the loan is not treated as a higher education expense, but rather was used to pay for qualified higher education expenses that are now being paid through other means. But you generally cannot use a payment now to retroactively pay for expenses from a prior payment period that were already paid through other means.
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