College Savings: Plan for Non-Qualified Education Expenses, Too

You’ve set up a 529 Plan for your future student and you are funding it regularly. You think you have college savings under control, and you’ve done well. As your student approaches the college years, give some thought to the total cost of college. While a 529 Plan will cover most of the big ticket items of college, there are some non-qualified education expenses that you will still need to cover.

What is a Qualified Education Expense?

In the last few weeks, I’ve written about the 529 Plan and the Coverdell ESA. These can both be good college savings vehicles, but they all have one thing in common: In order to retain tax-free status, you have to use the funds withdrawn for qualified educational expenses. If you don’t use the funds for qualified educational expenses, then the withdrawal is subject to both regular taxes and an additional 10% penalty.

Fortunately, qualified educational expenses cover the basics of a college education:

  • Tuition
  • Required Fees
  • Required Textbooks
  • Required Supplies & Equipment
  • Room and Board*

Note the word “Required”. If you need a computer for school because your particular program or school requires it, then it’s qualified. But if there’s no written requirement, then it is a non-qualified education expense. That means you’ll need to fund the expense in something other than the tax sheltered accounts.

Room and Board is covered with some caveats. The student must be enrolled at least half-time, and the amount that is qualified can’t exceed the amount that the college includes in their cost of attendance. If your student is living on campus and has a meal plan, it’s covered. If your student lives and eats off campus, you’ll need to check the school’s prices to see how much of the expense qualifies. Anything you are spending over the published amount is a non-qualified education expense.

What are some other Non-Qualified Education Expenses?

Looking at the list of qualified expenses, you can see that most of the expensive items can be covered by the money from a 529 Plan or Coverdell ESA. There are several that can’t, though, and you’ll need to plan for these non-qualified expenses.

  • Ineligible institutions. There are some schools that are not eligible for federal student aid, and those aren’t eligible for tax-deferred spending either. Fortunately those are rare. Most 4 and 2 year programs, including vocational schools, qualify. Even schools outside the US may qualify. (You can make sure that the schools your student wants to attend are eligible here.) If the school your student wants to attend is ineligible, consider programs elsewhere unless you can cover the cost. None of your costs at an ineligible institution will be qualified.
  • Non-required Supplies and Equipment: Your student’s program may not require a computer. Your student may still find one necessary for taking notes and completing assignments.
  • Non-required Student Fees
  • Insurance and Health Care
  • Non-Credit Courses-unless required by the student’s program
  • Transportation: Whether you are trying to get your student to and from their out of town school, funding a daily commute, or just funding excursions off campus, your student will incur some transportation costs.
  • Phones and Phone Plans
  • Personal spending: Your student will still need money for personal care and entertainment. How much will depend on the student, but this category is the one most likely to lead to overspending. Make sure you and your student have a plan and a budget for handling discretionary spending.

Funding Non-Qualified Education Expenses

The good news is that Non-Qualified Expenses tend to be discretionary. That doesn’t mean they aren’t real expenses, though. Discretionary spending by college students can easily run around $3000 per year or more.  Fortunately, that’s within the scope of what can be earned in a part-time job, so consider making all or part of those expenses your student’s responsibility. Students may also be able to put money aside from high school and summer jobs to cover the non-qualified expenses. Not every student can manage a job while keeping up with their studies, though. If balancing work and studies is not practical, at least make your student put some of their high school graduation funds and other monetary gifts aside for college spending money.

Since many of the non-qualified expenses mirror expenses that high school students incur, some parents choose to cover these expenses through their own income. If you do that, make sure that your student understands the level of support they can expect and when and if they will get more money. You don’t want the student to think their money for the year is only supposed to cover a semester (or a month!). Also, set expectations of what happens if the student exceeds their budget. College is often the first time a student has control of their own finances, and sometimes mistakes happen. You may not want your student racking up big credit card debt because they have charged more than they can cover with their allowance.

Funding the non-qualified expenses won’t be your first concern, especially if your future college student is still in grade school. The vast majority of your future tuition bill will be expenses qualified, so tax-deferred savings are best. But once your student starts narrowing schools down, you’ll need to make a plan for handling all of their college costs. If you want to start putting money aside for non-qualified expenses ahead of time, consider putting some extra money into a taxable account like a brokerage account or money market. While you won’t get the tax-free growth that a 529 Plan or Coverdell ESA provide, you can use the money for anything. Including covering your kid’s dorm room decor and pizza addiction.

Image courtesy of nenetus at FreeDigitalPhotos.net

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