You Can’t Use 529 Money for These 6 College Expenses

 February 21, 2020
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When it comes to saving for college for their kids, many parents across the country make use of the 529 plan. But what exactly is a 529, and what are the 529 qualified expenses?

The 529 is a state-sponsored college savings plan that comes in two versions: the prepaid tuition plan and the education savings plan:

  • Prepaid tuition plans allow parents to lock in future college credits at current prices at participating schools, typically state universities.
  • The education savings plan is a tax-advantaged investment account designed to save for future college expenses, including tuition, room and board. Withdrawals from these accounts can be used to pay for qualified expenses at any college, or trade or vocational school, and $10,000 per year can go toward expenses at elementary and secondary schools.

A 529 plan can be very helpful, particularly as qualified withdrawals are typically untaxed, but it doesn’t provide a free pass for all college expenses. In fact, if you do use 529 distributions for non-qualified expenses, you could be subject to federal and state income taxes, and even be levied an additional 10% tax penalty on earnings.

Are you the beneficiary of a 529 plan, or a parent who funded one for a child? If so, you may be asking, “What exactly can I use my 529 money for — and what can’t I?”

Which college costs don’t qualify as 529 expenses?

What are qualified expenses for 529 plans? You can use 529 withdrawals to pay for school costs such as tuition, room and board, some supplies (including textbooks that are part of a required reading list, and laptops if your school requires them) and school-related services for special-needs students. The SECURE Act even allows for up to $10,000 in 529 money to be used to repay student loans.

However, there are many costs associated with college that are not 529 qualified expenses. Below are some expenses for which you should avoid using your 529 money:

1. College applications and testing
2. Insurance
3. Transportation
4. Sports and club activity fees
5. Dorm room furniture and decorations
6. Exceeding your ‘cost of attendance’

1. College applications and testing

Before you go to college you have to apply, and this often involves taking standardized tests such as the SAT and ACT. Application and testing costs (not to mention tutoring costs if you need help with test prep) can really add up. So can you use your 529 money to help lessen the financial blow of application season?

Unfortunately, no. While 529 qualified expenses cover college costs, they do not cover pre-college costs such as these.

2. Insurance

Health insurance, car insurance, renters insurance — these are necessary expenses for many students. However, student insurance costs aren’t in the category of 529 qualified expenses. So, for example, while you may use your car to drive to school, you cannot use 529 funds to insure the vehicle.

3. Transportation

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 taking the train to campus, you can’t use your 529 distributions to cover the cost of your transport.

4. Sports and club activity fees

When you enroll in college, there are many fees involved. In fact, you might be surprised at how fast these student fees can add up.

Fees required for college enrollment, such as computer lab costs, are typically 529 qualified expenses. If you live in a fraternity or sorority house, your 529 funds may also be used to go toward this housing expense. But they cannot be used to pay for related dues.

Sports and club activity fees are also not qualified 529 expenses. So if you want to join an intramural basketball league or a college chess club, you’ll have to use outside funds, rather than your 529 withdrawal money, to pay for it.

5. Dorm room furniture and decorations

Room and board are covered by 529 withdrawals as long as you have an education savings plan (generally, the prepaid plan cannot be used to cover these expenses) and you are at least a part-time student. However, that doesn’t mean you can use your plan money to decorate your room in the latest trendy style. Room furnishings and decorations are considered personal expenses, and thus aren’t included as qualified 529 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 living costs such as housing and food is based on the cost of attendance at your chosen school. Therefore, you should be careful not to exceed this amount.

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, you must keep the costs within the given cost of attendance at the school. In other words, you can’t pay any more to live and eat off campus than you would to live in the dorms and eat in the dining hall, per the school’s calculations.

If you have questions about your own school’s limit on housing and food costs, ask the financial aid office for the cost of attendance so you have some guidance.

Keep your costs separate

When 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.

Try to avoid putting 529 qualified expenses on the same transaction with ineligible costs. For example, 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 may be less likely to draw the attention of the IRS when you prepare your taxes.

Other ways to pay for college expenses

A 529 plan can be a great way to help pay for college expenses, but it’s important to be aware of the limits on such spending so you don’t end up being penalized.

That said, a 529 plan may not cover everything. If you find you still have a college funding gap after using your 529 or other savings plans, you can make use of federal loans, make money through a work study program and look for scholarships and grants. You can also apply for private student loans, although you should be aware that these loans are often not as flexible and do not offer the same benefits as federal loans.

Alternatively, if you find you have an excess of 529 funds when you are done paying for college expenses, here are ways you can spend that leftover money without incurring penalties.

Rebecca Stropoli contributed to this report.

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CollegeAve Disclosures

College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community 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. As certified by your school and less any other financial aid you might receive. Minimum $1,000.
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  3. 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.

Information advertised valid as of 9/15/2022. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.

2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.

Earnest Disclosures

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 3.47% APR to 13.03% APR (excludes 0.25% Auto Pay discount). Variable rates range from 2.80% APR to 11.69% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. Although the rate will vary after you are approved, it will never exceed 36% (the maximum allowable for this loan). Please note, Earnest Private Student Loans are not available in Nevada. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

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4 Important Disclosures for Edly.

Edly Disclosures

1. Loan Example:

  • Loans from $5,000 – $20,000
  • Example: $10,000 IBR Loan with a 7% gross income payment percentage for a Senior student making $65,000 annually throughout the life of the loan.
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About this example

The initial payment schedule is set upon receiving final terms and upon confirmation by your school of the loan amount. You may repay this loan at any time by paying an effective APR of 23%. The maximum amount you will pay is $22,500 (not including Late Fees and Returned Check Fees, if any). The maximum number of regularly scheduled payments you will make is 60. You will not pay more than 23% APR. No payment is required if your gross earned income is below $30,000 annually or if you lose your job and cannot find employment.

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Citizens Bank Disclosures

  • Variable Rate Disclosure: Variable interest rates are based on the 30-day average Secured Overnight Financing Rate (“SOFR”) index, as published by the Federal Reserve Bank of New York. As of September 1, 2022, the 30-day average SOFR index is 2.23%. Variable interest rates will fluctuate over the term of the loan with changes in the SOFR index, and will vary based on applicable terms, level of degree and presence of a co-signer. The maximum variable interest rate is the greater of 21.00% or the prime rate plus 9.00%.
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Funding U Disclosures

Offered terms are subject to change. Loans are made by Funding University which is a for-profit enterprise. Funding University is not affiliated with the school you are attending or any other learning institution. None of the information contained in Funding University’s website constitutes a recommendation, solicitation or offer by Funding University or its affiliates to buy or sell any securities or other financial instruments or other assets or provide any investment advice or service.