Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / Using 529 Plans for College Application Fees and Test Prep
Transcript
- Lucas: So Luna, we've covered a lot of 529 territory—tuition, room and board, even laptops. But there's one expense that hits every family during senior year, and it's easy to overlook. Luna: What's that? Lucas: College application fees. You know, the average student applies to about six schools. At fifty to ninety dollars a pop, that's easily three to five hundred dollars just to hit submit. Luna: And that's before you even think about test prep or sending those scores. Lucas: Exactly. And the good news is, application fees are a qualified 529 expense. The IRS has always allowed them, but few families know to use their 529 for this. Luna: So you're telling me my cousin could have paid for her daughter's application fees with her 529? She just paid out of pocket. Lucas: She could have, as long as the fee is required for admission. That's the key phrase—'required for admission.' Application fees qualify, but something like a campus visit tour might not. Luna: Okay, so what about test prep? Like SAT prep courses or those expensive tutoring sessions? Lucas: That's actually a bit trickier. The IRS hasn't explicitly listed test prep as a qualified expense. The rule says expenses must be 'for the enrollment or attendance' at an eligible institution. Luna: So is a prep course considered part of enrollment? Or is it just a helpful service? Lucas: It's gray. Some experts argue that test prep is directly tied to admission, so it should qualify. But the IRS hasn't given clear guidance, so you're taking on some risk if you claim it. Luna: Hmm, that's a big 'if' for a family trying to do the right thing. Lucas: Right. But here's the thing—the cost of the actual SAT or ACT exam is also a gray area. The College Board charges around sixty dollars for the SAT. That's an admission requirement, so it might be safer. Luna: So the test fee itself probably qualifies, but the prep course is a maybe. Lucas: That's my read. But let's step back. The bigger story is that many families just aren't using their 529 for these smaller, non-tuition costs. They think of 529s as 'tuition only,' and they miss out on tax-free growth. Luna: And that's a real missed opportunity, especially when you consider that a 529's earnings grow tax-free if you use them for qualified expenses. Lucas: Exactly. So let's break down what actually qualifies as a qualified expense. The IRS Section 529 says it's tuition, fees, books, supplies, and equipment required for enrollment or attendance. Also room and board if the student is enrolled at least half-time. Luna: And fees includes application fees? Lucas: Most tax professionals say yes, because it's required for enrollment. But the IRS hasn't explicitly listed it. You have to read between the lines. Luna: So a family could take a distribution to reimburse themselves for application fees, and as long as they keep good records, they'd likely be fine. Lucas: And that's the practical approach. Keep a log of each fee, the school, the date, and the receipt. If the IRS ever asks, you have documentation. Luna: Now, what about that other big cost during senior year: college application consulting? Some families spend thousands on those. Lucas: That's a definite no. Consulting services aren't required for admission—they're advisory. So you can't use 529 funds for that. Luna: Gotcha. So the line is drawn at what's required to get in. Lucas: Right. Now, here's a nuance that could trip people up. If you take a 529 distribution for a non-qualified expense, you owe income tax on the earnings plus a ten percent penalty. That can wipe out any benefit. Luna: So it's not just 'I'll use my 529 for whatever I want.' You have to be careful. Lucas: Exactly. And that's why we recommend planning ahead. If your child is a junior, start tracking eligible expenses now—application fees, test fees, even college credit exams like AP exams if they're required for placement. Luna: AP exams? Those count? Lucas: If the college requires them for credit or placement, they can be considered qualified. Another example is the enrollment deposit—that's required, so it qualifies. Luna: That's helpful. So what about the financial aid angle? We've talked before about how 529 assets can affect aid. Does using the 529 for application fees change anything? Lucas: Great question. The FAFSA asks about parent assets, and a 529 is counted as a parent asset, which has a relatively low impact on aid—capped at about five point six four percent. But when you take a distribution to pay for application fees, that's not reported as income if it's a qualified expense. Luna: So it's a smart way to use funds without hurting aid eligibility. Lucas: Exactly. And remember, the SECURE Act expanded 529 plans to cover apprenticeships and student loan repayments, but application fees have always been allowed. It's just not widely known. Luna: So for a family doing the math on senior year costs, using a 529 for application fees could save them hundreds of dollars in taxable income. Lucas: And if they're in a high tax bracket, that's meaningful. Let me give you a concrete example. Say a family has thirty thousand dollars in a 529 that's grown to forty thousand. If they take out five hundred for application fees, the earnings portion is about a hundred and twenty-five dollars. If they paid tax on that, it might be thirty-five dollars in federal tax, plus a twelve-dollar penalty. So they save that by using the 529 correctly. Luna: Every little bit helps, especially when you're writing checks to five different colleges. Lucas: Exactly. And that's a good segue to a practical tip: time your withdrawals. If you reimburse yourself, make sure the expense was incurred in the same calendar year as the distribution. Otherwise, you might run into a mismatch. Luna: So don't wait until May to reimburse an application fee from December. Lucas: Right. Keep it in the same year. Also, if you have multiple 529 accounts—say one for each kid—make sure you take the distribution from the correct account. It's tied to the beneficiary. Luna: Got it. Now, before we wrap up, I want to circle back to something you mentioned earlier about test prep. Is there any way to use a 529 for that legally? Lucas: The safest route is to treat it as a non-qualified distribution and pay the tax and penalty. But that might still be worth it if the 529 has big gains. However, some states offer their own tax deductions, which can offset some of that. It's just not a clean 'yes.' Luna: So the takeaway is: use your 529 for application fees, test fees, and other required costs, but be cautious with 'maybe' expenses like prep courses. Lucas: Exactly. And keep detailed records. That's the best defense if you ever get audited. Luna: Alright, Lucas, this has been a great guide. I think a lot of families will appreciate knowing they can use their 529 for these lesser-known expenses. Lucas: Glad we could clear it up. And remember, if you're planning for college, every qualified expense you cover with your 529 is a tax-free withdrawal, and that's a win.