While college may be a remote — and quite different — experience for many students this fall, most college-related expenses remain the same.
Families may consider using a 529 college savings plan to cover qualified expenses even if their child is studying at home.
Room and board
As a significant part of the college bill, room and board is considered a qualified expense under 529 plans. Because of the pandemic, many colleges have changed to a remote curriculum. Some students may have changed plans and are living off campus this semester or year.
Families need to find out how the college is defining room and board and what rules have been established. In general, if students are living off campus, rent, food, and utilities expenses can be considered qualified expenses for a 529. There is a stipulation, however, that these expenses cannot exceed the college or university’s published allowance for room and board, even if the off-campus expenses are higher. Students living off-campus should keep records and receipts to validate the expense.
Families may also be able to use 529 assets for room and board for students living at home. But the cost allowable must be lower than the cost of living on campus. Some colleges may specify a cost for “commuters” or “at home.” Still, the student at home would only be able to use the 529 savings for the lesser amount. Some colleges do not make any distinction in cost between on-campus and living at home.
Computer-related expenses are also considered qualified under 529 plans. Due to the pandemic, students working at home may need to upgrade computer equipment or enhance WIFI and internet services. While there may be fewer textbook purchases, students may need additional software to submit homework. Since 2015, the purchase of a computer and any related peripheral equipment, computer software, or Internet access and related services are considered 529 qualified expenses.
Non-qualified expenses. Families will need to consider other sources to fund certain non-qualified expenses. Students who had planned to live in a college dormitory but changed plans to live in off-campus housing may have unexpected transportation needs. These costs are not considered qualified expenses for a 529 plan. These costs would also not likely be covered by tuition insurance. Most insurance plans only offer a refund if a child becomes sick, and not if the school decides to have all students study remote. At the same time, there could be fewer costs for students studying at home.
Timing of distribution. Families should remember that qualified expenses have to be timed with the 529 distribution. That is, the plan distributions must be made during the same tax year that the qualified expenses are incurred. For example, if a family waits until January to pay tuition, they need to make sure that the 529 withdrawal is made in the same tax year.
Be mindful of double dipping. Families need to coordinate 529 withdrawals with other tax benefits. Individuals taking advantage of the American Opportunity Tax Credit or the Lifetime Learning credit, must not benefit twice from a tax perspective for the same college expense.
Tuition refunds. Many families received tuition refunds from colleges in the spring due to onset of the pandemic and shutdowns to contain the virus. Your accounting of 529 distributions should reflect that. If a distribution was made for those expenses, the refund can be rolled back into the 529 account. There was an extension to the normal 60-day time limit to re-contribute the funds when the Treasury Department extended the tax filing deadline. This provision expired on July 15, 2020. If the funds were not rolled back into a 529, then the initial distribution needs to be matched against other future qualified expenses (within the same tax year).
Stick with your plan
A 529 plan is not the only source of funding for college expenses. Families of students studying at home can also rely on federal financial aid and loans. Living at home, or off campus, will be factored in to the overall “cost of attendance” by the college. Colleges determine this cost each year and make the calculation based on tuition, fees, room and board, books, supplies, and transportation. Families can use financial aid and loans for tuition and fees and room and board. The remaining funds can be used for living expenses. This year many colleges are modifying their cost of attendance calculation based on campus changes due to the pandemic.
For families that have mapped out a financial plan for college, they may find they can stay on track and stay on script, despite the changing landscape. The change in venue for their child may mean a different experience for college. But the financial plans to get them through college remain relevant for meeting those goals.
To learn more about the basic of a 529 college savings plan, explore Putnam’s website.
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.