One of the best ways to save for college is by using a 529 plan.
With the help of long-term college savings, you can reduce your need for student loans by covering 529 qualified expenses like tuition, room and board, and some regular student fees.
However, a 529 plan isn’t a free pass for all the things you need to pay for when you attend college. There are some expenses that can’t be covered by using money from your 529.
How does a 529 plan work?
The whole point of a 529 plan is to provide you with tax advantages when you withdraw money to pay for college expenses. Essentially, distributions are not subject to federal tax. And, they’re generally not subject to state tax when used for qualified higher education expenses by the beneficiary.
However, if the amount distributed is greater than the beneficiary’s adjusted qualified education expenses, taxes may be owed. And, keep in mind however that all contributions to a 529 plan are not deductible.
What’s more, if you use money in your 529 plan for unqualified expenses, those tax advantages disappear. If you’re misusing 529 money for ineligible expenses, contact a knowledgeable financial expert to determine your options.
And if you need to rollover money from one 529 plan into another or change beneficiaries, you have 60 days to do so. Just make sure you haven’t rolled that person’s account in the prior 12 months.
If you aren’t inside the 60-day rollover period but are still in the same calendar year as the distribution, you could potentially pre-pay some of next year’s 529 qualified expenses with that money instead.
Which college costs don’t qualify as 529 expenses?
Most of us don’t set out to misuse our 529 money. But, it can happen. You can avoid a great deal of unpleasantness by understanding which costs aren’t qualified 529 expenses.
We all need insurance when we go away to school. Car insurance, renters insurance, and other types of insurance can protect your assets.
However, insurance costs aren’t 529 qualified expenses, so watch out. Just because you’re driving your car to school, doesn’t mean you can deduct the cost of insuring it.
Speaking of driving your car to school, none of your transportation costs are 529 eligible expenses.
Whether you’re taking the bus, fueling your car, or getting to campus some other way, you can’t use your 529 distributions to cover the cost of your transport.
3. Student loan repayment
It would be great to pay off your student loans a little early, right? Just take some of that money from your 529 and put it towards what you owe.
Sadly, this isn’t an acceptable use of your funds. You aren’t allowed to take money out of a 529 and use it to pay down student loans.
4. Sports and club activity fees
When you enroll in college, there are fees you’ll need to pay. In fact, you might be surprised at how fast student fees add up.
Fees required for enrollment, such as computer lab fees, are usually 529 qualified expenses. However, sports and club activity fees paid as a result of extracurricular activities don’t qualify.
So if you want to join an intramural basketball league, you’ll have to use “regular” money to pay for it.
Where you live can be covered by your 529 money. However, that doesn’t mean that you can use your plan money to trick out your dorm room. Room furnishings aren’t included as qualified 529 expenses.
The same principle applies when it comes to food. You can buy some groceries with your money, but entertainment and dining out aren’t 529 qualified expenses.
6. Exceeding your “cost of attendance”
Every school estimates attendance costs. These costs provide an idea of what you can expect to pay when you attend a specific school.
How much money you can withdraw from your 529 to pay for your living costs are based on the cost of attendance at your chosen school. Therefore, you should do your best to avoid exceeding it.
It’s easy to stay within estimated costs of attendance when you live on campus and buy a meal plan from the cafeteria. But when you live off campus and buy your own food, keep the costs within the cost of attendance at the school.
If you don’t know where to find it, ask the financial aid office for the cost of attendance so you have some guidance.
Keep your costs separate
When you’re using your 529 money to pay for college costs, keep a record of all your purchases. When tax season arrives, you’ll need receipts to back up your claims.
Avoid putting 529 qualified expenses on the same transaction with ineligible costs. If you’re buying groceries for the week, don’t toss shampoo and soap on the same transaction as your food purchases.
While it may seem awkward to divide your purchases and complete two transactions, it could make record-keeping easier. And, you’re less likely to draw the attention of the Internal Revenue Service (IRS) when you prepare your taxes.
Your 529 plan is a great resource for helping you pay for college and reducing your need for student loans. But, it’s not a free-for-all. By planning ahead and knowing which expenses are eligible you can stay within all guidelines listed without issue.
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|* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
** Discover's lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.
1 Important Disclosures for Earnest.
Explanation of Rates “With Autopay” (APD)
In school deferred payment is not available in AL, AZ, CA, FL, MA, MD, MI, ND, NY, PA, and WA).
2 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
3 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 7/1/2019. Variable interest rates may increase after consummation.
4 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
5 Important Disclosures for Discover.
|3.99% – 11.44%1||Undergraduate and Graduate|
|3.98% – 11.35%*,2||Undergraduate and Graduate|
|3.96% – 11.98%3||Undergraduate, Graduate, and Parents|
|3.66% – 9.64%4||Undergraduate and Graduate|
|3.87% – 11.87%**,5||Undergraduate and Graduate|