As the cost of attending college increases both in the U.S. and across the globe, how to pay for it remains a big concern. Many students and their families who planned to use 529 plans to fund their education here are discovering this same plan can also be used to study abroad.
Understanding the 529 Plan
A 529 plan is a tax-advantaged college savings account. Permitted withdrawals are strictly limited to specified education expenditures. When you invest in a 529 account, your money grows at a rate that’s often several times higher than the average savings account. Interest rates vary significantly by the fund, so do your research before making your choice.
While different states offer different funds—as well as varying tax credits and deductions—don’t assume you have to buy into a plan offered by the state where you reside. The majority of 529 savings plans don’t have state-residency requirements, leaving you free to choose from a vast number of plans.
- 529 savings plans can be used to pay for study abroad programs but don't cover day-to-day expenses or travel costs.
- Your host school must be approved under Title IV and its federal student aid programs to use 529 funds to pay for it.
- Most 529 savings plans allow students to use them for schools outside of their home state.
Which Study-Abroad Expenses Are Eligible?
Before putting down a deposit on an expensive study-abroad program, familiarize yourself with the rules regarding 529 plans and educational trips. The good news? The bulk of study-abroad expenses consists of tuition, fees, and approved room-and-board expenses, which are eligible to be funded with a 529 plan college-savings account, just like they are in the United States. Required textbooks—which can be a significant expenditure—are also covered.
In addition, under the Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, 529 funds can be used to pay back student loans (up to $10,000) and for eligible apprenticeships, both of which could be useful for those studying abroad.
If you decide to live off-campus because it is less expensive than housing provided by the school, especially during the summer months, be sure to take into account that your rent will not be covered because it will no longer be a qualified expense.
If you can afford to pay for it yourself and think you want to save your 529 funds for other expenses, do the math and decide if the savings truly outweighs having your housing covered.
Which Expenses Are Not Eligible?
Unfortunately, there are study-abroad costs that are not covered because they are not considered qualified expenses by the IRS. These include:
- The cost of traveling to and from the school, including airline tickets, train tickets, cab fares, etc.
- International health insurance or medical costs not covered by U.S. health insurance
- Basic living expenses, which may be cheaper or more expensive than in the U.S.
- Any costs associated with an international cell phone
- Sports or other activities that are not part of the college curriculum
- Foreign transaction fees
You can't use 529 funds for travel, so budget accordingly for plane tickets to get to your destination and home again.
Read the Fine Print
If you’re enrolled in a semester-long Italian class at your local university and hope to join the Italian department’s study-abroad summer in Perugia, withdrawing money from a 529 plan might sound like the perfect way to fund the program. Here’s where the fine print comes in.
For such expenses to qualify, you’ll probably have to increase your course load because the IRS requires you to be at least a half-time student. Also, make sure the program you’re attending is offered by an IRS-approved educational institution. Most accredited universities fall into this category, but it pays to double-check.
The Bottom Line
The fantasy of studying abroad in some of the world’s most fascinating cities is often accompanied by sticker shock as tuition and room-and-board fees for these programs continue to rise. Fortunately, 529 plans offer those willing to plan ahead a smart way to save money on qualified expenses for educational travel. Just make sure to read the fine print.