Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Study Abroad Program Fees
Transcript
- Lucas: So Luna, we've talked a lot about 529 plans covering everything from parking passes to grad school entrance exams, but there's one big bucket we haven't really touched—study abroad. I mean, we did an episode on it a while back, but that was more of an overview. Today I want to drill into the specifics, because the rules are trickier than most people think. Luna: Yeah, I bet. I remember the general idea—tuition, room and board, even airfare can be covered—but the fine print is probably where families get burned. Lucas: Exactly. And the stakes are high. If you take a distribution that doesn't meet the IRS definition of a qualified expense, you're looking at income tax on the earnings plus a ten percent penalty. So let's start with the basics: what actually counts as a qualified expense for study abroad? Luna: From what I've read, it's pretty broad—tuition, fees, books, supplies, room and board, even some travel costs. But the kicker is that the program has to be at an eligible educational institution, and the student has to be enrolled at least half-time. Right? Lucas: Right. The institution has to be eligible for federal student aid programs, which most accredited foreign universities are. But here's the catch: the IRS requires that the student be enrolled at least half-time at an eligible institution. That's the same rule as domestic schools. So if your kid is doing a three-week summer program in Paris, that might not qualify unless the school considers them half-time. Luna: So the length of the program matters a lot. A semester abroad is almost always fine, but a short-term faculty-led trip might not be. Lucas: Exactly. And that's where I've seen families get caught off guard. They think 'well, it's education, so it's covered,' but the IRS disagrees. Let's walk through a concrete example. Suppose your kid is going to the University of Barcelona for a semester. Tuition is clearly qualified. Room and board? Yes, but there's a limit—the school's published cost of attendance for that semester. If you pay more for a swanky apartment, the excess is not qualified. Luna: Good point. And what about airfare? That's a big one for study abroad. Lucas: Airfare is qualified, but only for direct travel to and from the destination. And it's limited to the amount the school lists in its cost of attendance. If the flight is $1,200 and the school says $800, you can only use $800 from the 529. The rest would be subject to tax and penalty if you take it out. Luna: That's a nice trap. So you have to check the school's published numbers before you withdraw. Lucas: Absolutely. And here's another one: health insurance. Many study abroad programs require students to have coverage, and that's a qualified expense. But if you're paying for a separate policy that's not required by the program, it probably doesn't count. Luna: I didn't know that. So it's not just about racking up any education-related cost—it has to be required by the program or the school. Lucas: Right. And that's why record-keeping is so important. You want to keep the program's official documents showing that health insurance is mandatory. That way, if the IRS audits, you have the proof. Luna: Let's talk about the financial aid angle. If your kid gets a scholarship or a grant for study abroad, how does that affect 529 withdrawals? Lucas: Good question. Scholarships reduce the amount of qualified expenses you can pay with 529 funds. So if the scholarship covers tuition, you can't take a distribution for that same tuition. But you can use the 529 for other qualified expenses like room and board, as long as they're not covered by the scholarship. Luna: So it's a balancing act. You don't want to double-dip and trigger a penalty. Lucas: Exactly. And here's a subtle point: if your child receives a scholarship, some families choose to withdraw an amount equal to the scholarship from the 529 and contribute that to a Roth IRA for the child, thanks to the SECURE 2.0 provision we covered a few episodes ago. But that's a separate path. Luna: Right, we did that episode. But for now, let's stay on study abroad. What about currency fluctuations? If the euro strengthens, does that affect the qualified amount? Lucas: The IRS works in U.S. dollars when you file your taxes. So you have to convert the expenses to dollars using the exchange rate on the day you pay. If the euro jumps, your qualified expenses in dollar terms might be higher than you budgeted, but you're still limited to the school's published cost of attendance. So you can't just withdraw extra to cover the exchange rate loss. Luna: So the practical advice is to check the school's cost of attendance, keep all receipts with the exchange rate, and only withdraw what's actually qualified. Lucas: Right. And there's one more twist: some foreign universities don't report enrollment to the IRS the way U.S. schools do. That's fine, but you need to keep your own records—like an official letter from the school confirming the student's enrollment and half-time status. Without that, you're vulnerable if the IRS asks questions. Luna: That's a great point. It's all about documentation. By the way, Lucas, I know we're a listener-funded show—and honestly, the fact that people chip in through buy me a coffee is what keeps us going without ads. Even a couple of dollars a month helps us keep making these deep dives. Lucas: Yeah, it really does. We appreciate every bit of support. It allows us to spend the time researching these topics properly. And if you're a regular listener, consider throwing a coffee our way at buy me a coffee dot com slash fexingo. It's a simple way to keep the show free for everyone. Luna: Alright, back to the weeds. So let's talk about what happens if your child's study abroad program gets canceled mid-semester. That's a real scenario. Lucas: That's a messy one. If the program is canceled, you might have already paid for non-refundable airfare or housing. If you can't get a refund, those costs could still be qualified if they were required for the program. But if you're stuck with a course that you can't complete, you might have to return the funds to the 529 to avoid taxes and penalties. Luna: So the key is to only withdraw money as you pay for expenses, not all upfront. That way you can adjust if something changes. Lucas: Exactly. A lot of families make the mistake of taking a big distribution at the start of the semester and then find out the program changed. Then they're stuck with non-qualified funds. So my advice is to pay expenses from the 529 as they come due, and keep a running tally. Luna: That sounds like a solid strategy. And what about students who are studying abroad but still paying rent back at their home campus? Can they use 529 funds for both? Lucas: No, you can't double-dip. You can only count the room and board for the location where the student is actually living during the academic period. If they're abroad, you can't also claim their apartment back home. That would be a red flag for the IRS. Luna: Good to know. So it's really about following the rules to the letter. Any final tips? Lucas: One more thing: if your child is studying abroad, they might need a new laptop or other equipment. Those are only qualified if the school requires them. So check the course syllabus or program handbook. If it's not explicitly required, don't use 529 funds for it. Luna: That's a perfect example of the 'required' theme we've been talking about. So the bottom line: plan, document, and stay within the school's official cost of attendance. Lucas: Bottom line indeed. And when in doubt, talk to a tax professional who knows 529 rules. It's a small cost to avoid a big penalty later. I think that's a great place to wrap up for today. Luna: Thanks for listening, and we'll catch you next time.