First Quarter 2014 – Spending For College

I was recently talking with a client who had saved diligently for his son’s college in a 529 college savings account only to find out that his son qualified for a “free ride” in scholarships and financial aid.  He was quick to point out that he felt blessed with his son’s achievement, but was left with a question of “Now what am I supposed to do with this money I saved for college?”  We often talk about the importance of saving for college, but what about the spending side of the equation?

IRS Publication 970 outlines what is considered a qualified educational expense.  The publication states that 529 funds can be used at any educational facility that is eligible to participate in a student aid program administered by the U.S. Department of Education, so you can use a 529 savings account for colleges or vocational schools in all of the 50 states.  The funds can be used to cover the cost of tuition and fees as well as required books, supplies, and equipment.  It also can pay for reasonable room and board expenses for full time students.

If you find yourself in the fortunate position of having many of these expenses covered by scholarships, you aren’t out of luck.  529 accounts can be used for most graduate program expenses as well as many professional schools.  If you don’t think the student (the beneficiary of the 529 plan) will ever make use of the funds, then you can change the beneficiary to a family member of the student that will.  One strategy could be to hold onto the account and save it for future grandchildren.

As a worst case, if the student receives scholarships that eliminate the need to use funds from a 529, then you can take money out of the 529 matching the amount of the scholarship and avoid the federal penalties.  Other taxes and state penalties may still exist, but you would be free to use the funds for whatever purposes you wish.

Saving for college is a daunting task.  Fortunately, spending for college is much easier even if you save too much.

The following social media links will take you away from our website. Please be aware that neither Investment Planners, Inc. or The Volkers Group, LLC are responsible for the content available on external websites.

Comments are closed.