Can I use a 529 plan to study abroad?
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Studying abroad is valuable for many reasons, but it almost always costs more than a semester at your home school. If your child is heading abroad for higher education, you might be looking for ways to cover the cost. One way to foot the bill is to use a 529 plan. These tax-advantaged investment accounts allow you to stash away money for qualified education expenses, including tuition at eligible international schools. Here’s what to know about using these accounts for studying abroad.
What is a 529 plan?
A 529 plan is an account that allows you to save after-tax money for education expenses. You can withdraw the funds tax-free as long as they’re used for qualified education expenses at universities, technical schools and vocational programs. The funds can even be used to pay for tuition at overseas universities or K-12 private schools.
One of the benefits of 529 plans is that in some states, you may receive tax deductions or credits on your contributions. They’re also flexible; if your child receives scholarships or chooses not to attend college, you can designate a new beneficiary, and you can invest in almost any plan.
You can invest your 529 funds, but investment options can vary from plan to plan, and some 529 plans charge higher fees than others. Additionally, if you take money from the account for nonqualified education expenses, you’ll be assessed a 10 percent penalty, and you’ll also need to pay income taxes on the earnings portion of your withdrawal. The only exceptions to the 10 percent penalty include:
- The beneficiary dies or becomes disabled.
- The beneficiary attends a military academy.
- The beneficiary receives a scholarship.
Keep in mind that income tax will still apply in these scenarios.
Can a 529 plan be used for study abroad?
Distributions from a 529 plan can be used to pay for qualified higher education expenses at eligible international schools or universities. But to avoid taxes and penalties, it’s important to be sure that the school and the withdrawals meet IRS rules. Here are a few factors to consider.
Are the expenses qualified?
You’ll need to use the money from a 529 plan on qualified higher education expenses. This restriction applies to both U.S. schools and international schools. Additionally, students must use the plan withdrawals in the same calendar year that the qualified expenses are paid.
How long is the student’s stay?
Students must be enrolled in school at least half time for a 529 plan withdrawal to count as a tax-free distribution. The beneficiary may enroll at an international school for their entire educational program, or they can choose to spend a semester or two abroad.
Is the international school eligible?
To use 529 funds for an international school, the institution must be eligible for Title IV federal student aid. You can find out which schools qualify by checking the Department of Education’s list of participating schools. There are 760 international schools that are currently eligible for federal student aid.
If you can’t find a particular institution on the list, contact the school’s administrative office and ask whether students can apply for federal financial aid in the U.S. If the answer is “yes,” ask for the school’s code.
What college expenses are covered by a 529 plan when you study abroad?
A 529 plan allows you to save money for “qualified” education expenses. Generally, those include the normal costs of attending an educational institution, such as:
- Tuition and fees.
- Books, textbooks, supplies and equipment.
- Room and board (if enrolled at least half time).
But a 529 plan won’t cover certain expenses, including:
- International health insurance.
- Travel expenses.
- Basic living expenses.
- Sports and activity fees.
If you use 529 funds to pay for these nonqualified expenses, the IRS will apply income tax to the withdrawals, as well as a 10 percent penalty on the earnings portion of the withdrawal.
Should I use my 529 to study abroad?
A 529 plan can be a great way to cover the cost of school overseas. To figure out if this is a good fit for your family, first make sure that your child wants to attend an eligible school and that you plan to use the funds for qualified purposes.
Next, you can compare program costs. If your child enrolls in a study abroad program for one or two semesters, they’ll pay tuition and fees to their home university. But if they’re earning a degree through the host school, the school determines the cost of attendance. It might make sense to reserve 529 funds for expenses at the child’s home school if the international school offers a much lower cost.
If the study abroad program is offered through a third-party service, keep detailed records of the expenses you pay. That way, you’ll be prepared if the IRS audits your tax return and tries to challenge whether the expenses are eligible for tax-free withdrawals.
Other ways to pay for study abroad
While a 529 plan can be a great way to cover your study abroad expenses, it may not be enough, or the school you’re attending may not be eligible. Here are some other potential ways you can get the funds you need to pay for your experience:
- Apply for scholarships: The U.S. Department of State provides a list of scholarships available for students studying abroad in different countries. These scholarships are typically provided by foreign governments. You can also use scholarship search engines to seek out financial aid from private organizations.
- Manage your expenses: Unless your study abroad plans are already set in stone, consider going to a country with a lower cost of living. For example, South America and Eastern Europe may be cheaper options than Western Europe. Also compare program costs between universities and try to find the right fit for your budget.
- Get a job: Depending on which country you’re planning to study in, you may have opportunities to work while you complete your coursework. Research visa requirements beforehand to understand what your options will be. You can also take a break between semesters and work at home before you travel.
- Apply for student loans: Some foreign universities are eligible for federal financial aid, including student loans. There are also private lenders that offer student loans specifically for studying abroad. Federal loans are typically more beneficial in the long run, so focus on those first, then consider private student loans as a last resort.
Take your time to map out your plans for studying abroad and how you’ll cover the expenses. The sooner you start with this process, the easier it will be to enjoy your study abroad experience without worrying about the financial side of things.