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

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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.

Need a student loan?

Here are our top student loan lenders of 2021!
LenderVariable APREligibility 
1.04% – 11.98%1Undergraduate, Graduate, and Parents

Visit College Ave

1.13% – 11.23%*,2Undergraduate, Graduate, and Parents

Visit SallieMae

3.80% – 9.36%3Undergraduate and Graduate

Visit CommonBond

2.20% – 6.17%4Undergraduate and Graduate

Visit EdvestinU

1.05% – 11.44%5Undergraduate and Graduate

Visit Earnest

1.82% – 11.32%6Undergraduate

Visit Ascent

N/A7Undergraduate and Graduate

Visit FundingU

1.12% – 11.23%8Undergraduate and Graduate

Visit SoFi

1.15% – 11.01%9Undergraduate and Graduate

VISIT CITIZENS

* 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.

1 Important Disclosures for College Ave.

CollegeAve Disclosures

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.

Rates shown are for the College Ave Undergraduate Loan product and include autopay 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.
 
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. This informational repayment example uses typical loan terms for a first year graduate student 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 7.10% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $141.66 while in the repayment period, for a total amount of payments of $16,699.21. 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 7/22/2021. 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 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

3 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.  If you choose to complete an application, we will conduct a hard credit pull, which may affect your credit score. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.


4 Important Disclosures for EdvestinU.

EdvestinU Disclosures

EDvestinU is a product of the nonprofit New Hampshire Higher Education Loan Corporation (dba The NHHEAF Network) NMLS ID#1527348.

APR range and repayment rates displayed assume a $10,000 loan disbursed in two equal disbursements. APR low assumes immediate repayment and 7 year repayment. APR high assumes deferred repayment and 15 year repayment. APR’s presented include a .50% interest rate reduction for electing to have payments automatically deducted from a bank account. The interest rate reduction for authorizing our servicer to automatically deduct monthly payments from a savings or checking account will not reduce the monthly payment, but will reduce the monthly finance charge, resulting in a lower total cost of loan. All examples are provided for educational purposes and actual terms may vary based on credit history, loan amount, applicable repayment term, and chosen repayment plan and method. Please note that the interest rate on variable rate programs may increase or decrease over time. The variable rate example assumes the same standard rate for the life of the loan. The NHHEAF Network reserves the right to modify or cancel its program at any time.  

Eligibility: Dependent and independent U.S. citizen students. Currently residents of Washington and California are not eligible for EDvestinU programs.
Students must be enrolled at least half-time at a U.S.-based Title IV, degree-granting college or university.
The borrower or cosigner (if applicable) must have a minimum adjusted gross income of $30,000.

Loan Limits: Minimum loan amount of $1,000.
Maximum loan amount is cost of education less aid received.

Repayment: Standard or graduated repayment options available during repayment; 7, 10, or 15 year term selected by the borrower.
6-month grace period available to borrowers electing a full in-school deferment. 
No prepayment penalty.
Payments may be postponed during repayment by qualifying for an economic hardship deferment.

Cosigner Release: Cosigner release allowed if an account is in current standing, after 36 months of consecutive & on-time payments with a borrower FICO >749 for EDvestinU Private Student Loans and minimum income requirement of $30,000 with no foreclosures, repossessions, wage garnishments, unpaid tax liens, unpaid judgments or other public records having an open balance exceeding $100 during the last 7 years. The borrower must not currently be involved in bankruptcy proceeding or had any bankruptcy filings during the past 10 years and cannot have any defaults on education loans.


5 Important Disclosures for Earnest.

Earnest Disclosures

  1. Rates include 0.25% Auto Pay Discount
     
  2. Explanation of Rates “With Autopay” (APD)
    Rates shown include 0.25% APR discount when client agrees to make monthly principal and interest payments by automatic electronic payment. Use of autopay is not required to receive an Earnest loan.

    Available Terms
    For Cosigned loans – 5, 7, 10, 12, 15 years. 
    Primary Only – 10, 12, 15 years

    In school deferred payment is not available in AL, AZ, CA, FL, MA, MD, MI, ND, NY, PA, and WA).


6 Important Disclosures for Ascent Student Loans.

Ascent Student Loans Disclosures

Ascent loans are funded by Bank of Lake Mills, Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: >AscentFunding.com/Ts&Cs;.

Rates are effective as of 07/01/2021 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes income-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. For Ascent rates and repayment examples please visit: >AscentFunding.com/Rates.

1% Cash Back Graduation Reward subject to terms and conditions, please visit AscentFunding.com/Cashback. Cosigned Credit-Based Loan student borrowers must meet certain minimum credit criteria. The minimum score required is subject to change and may depend on the credit score of your cosigner. Lowest APRs are available for the most creditworthy applicants and may require a cosigner.


7 Important Disclosures for Funding U.

FundingU 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.


8 Important Disclosures for SoFi.

sofiDisclosures

UNDERGRADUATE LOANS: Fixed rates from 4.13% to 10.66% annual percentage rate (“APR”) (with autopay), variable rates from 1.12% to 11.23% APR (with autopay). GRADUATE LOANS: Fixed rates from 4.13% to 10.90% APR (with autopay), variable rates from 1.10% to 11.34% APR (with autopay). MBA AND LAW SCHOOL LOANS: Fixed rates from 4.08% to 10.86% APR (with autopay), variable rates from 1.05% to 11.29% APR (with autopay). PARENT LOANS: Fixed rates from 4.23% to 10.66% APR (with autopay), variable rates from 1.20% to 11.23% APR (with autopay). For variable rate loans, the variable interest rate is derived from the one-month LIBOR rate plus a margin and your APR may increase after origination if the LIBOR increases. Changes in the one-month LIBOR rate may cause your monthly payment to increase or decrease. Interest rates for variable rate loans are capped at 13.95%, unless required to be lower to comply with applicable law. Lowest rates are reserved for the most creditworthy borrowers. If approved for a loan, the interest rate offered will depend on your creditworthiness, the repayment option you select, the term and amount of the loan and other factors, and will be within the ranges of rates listed above. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. Information current as of 4/1/2021. Enrolling in autopay is not required to receive a loan from SoFi. SoFi Lending Corp., licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. NMLS #1121636 (>www.nmlsconsumeraccess.org).


9 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

Undergraduate Rate Disclosure: Variable interest rates range from 1.15% – 11.01% (1.15% – 10.24 APR)Fixed interest rates range from 4.18% – 11.70% (4.18% – 10.83% APR).

Graduate Rate Disclosure: Variable interest rates range from 1.89% – 10.66% (1.89% – 10.41% APR). Fixed interest rates range from 4.64% – 11.23%% (4.64% – 10.95% APR).

Business/Law Rate Disclosure: Variable interest rates range from 1.89% – 9.22% (1.89% – 8.50% APR). Fixed interest rates range from 4.38% – 10.44% (4.38% – 9.72% APR).

Medical/Dental Rate Disclosure: Variable interest rates range from 1.89% – 8.02% (1.89% – 7.72% APR). Fixed interest rates range from 4.28% – 9.24% (4.28% – 8.94% APR).

Parent Loan Rate Disclosure: Variable interest rates range from 1.97% – 7.06% (1.97% – 7.06% APR). Fixed interest rates range from 4.94% – 8.58% (4.94% – 8.58% APR).

Bar Study Rate Disclosure: Variable interest rates range from 4.44% – 9.58% (4.44% – 9.52% APR). Fixed interest rates range from 7.39% – 12.94% (7.40% – 12.83% APR).

Medical Residency Rate Disclosure: Variable interest rates range from 3.53% – 7.03% (3.53% – 6.76% APR). Fixed interest rates range from 6.99% – 10.49% (6.98% – 10.09% APR).

Variable Rate Disclosure: Variable Rates are based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of June 1, 2021, the one-month LIBOR rate is 0.09%. Variable interest rates will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree and presence of a co-signer. The maximum variable rate is the greater of 21.00% or Prime Rate plus 9.00%. 

Fixed Rate Disclosure: Fixed rate ranges are based on applicable terms, level of degree, and presence of a co-signer.

Lowest Rate Disclosure: Lowest rates require a 5-year repayment term, immediate repayment, a graduate degree (where applicable), and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Rates are subject to additional terms and conditions, and are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.

Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer.  Borrowers should carefully review federal benefits, especially if they work in public service, are in the military, are considering possible loan forgiveness options, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision on our website including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.

Eligibility Criteria: Applicants must be a U.S. citizen, permanent resident, or eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For applicants who have not attained the age of majority in their state of residence, a co-signer is required. Citizens Bank reserves the right to modify eligibility criteria at any time. Citizens Bank private student loans are subject to credit qualification, completion of a loan application/Promissory Note, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens Bank participating school.

Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.

Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.