Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Your Childs Gap Year Adventure
Transcript
- Lucas: So it's mid-June 2026, and if you're a parent of a high school junior or senior, you might be hearing the words 'gap year' more than ever. And the question we keep getting is — can you use a 529 plan to pay for it? The short answer is yes, but only if you structure it right. Luna: And that 'right' part is where a lot of families trip up. I've seen people pull money out for a backpacking trip through Europe and then get hit with the penalty and taxes. Lucas: Exactly. The IRS doesn't define a gap year as a qualified expense. But they do define something called a 'qualified higher education expense' — and if your gap year program meets that definition, you're in the clear. The key is enrollment at an eligible institution. Luna: And before we go deeper — if you find these money conversations helpful, we just want to mention that listener support is what keeps this show ad-free. If you'd like to chip in, you can find us at buy me a coffee dot com slash fexingo. It's not expected, but it helps us keep doing this. Lucas: Yeah, we really appreciate it. So back to the gap year — the first thing you need is an eligible educational institution. That means a school that's accredited and eligible to participate in federal student aid programs. Most colleges are, but some gap year programs aren't. Luna: So if your kid is doing a program through a university — say, a study abroad type gap year — that might count. But a standalone program like Outward Bound? That depends on whether they've partnered with an accredited institution. Lucas: Right. Many gap year programs have actually started partnering with accredited colleges to offer transferable credit. For example, the National Outdoor Leadership School, NOLS, has a partnership with the University of Utah. So if your child enrolls in a NOLS course that's offered through that partnership, the tuition and fees become qualified expenses. Luna: And room and board? That's a big one for gap years because you're often traveling or living in a new place. Lucas: Room and board is covered, but only if the student is enrolled at least half-time. For a gap year, that usually means the program needs to be at least a certain number of credit hours. But the IRS has a special rule: if the program is less than half-time, you can still use 529 funds for room and board if the program is a 'qualified education expense' in its own right — but you need to be careful. The safe approach is to make sure the program is at least a standard academic period, like a semester, and that the student is enrolled at an eligible institution. Luna: So what about a program like City Year? That's a service-oriented gap year where you're working in schools. Lucas: City Year is an interesting case. They are not a college, but they do offer a living allowance and an education award through AmeriCorps. The 529 plan can't pay for the living allowance, but it can pay for the tuition if City Year offers college credit through a partner institution. And some City Year programs do partner with local colleges for credit. Luna: So the theme here is: tie the program to an accredited college, get some credit, and you're golden. Otherwise, you're looking at a non-qualified withdrawal with a 10 percent penalty plus income tax on the earnings. Lucas: Right. And that penalty is avoidable. I talked to a family recently whose daughter did a gap year in Costa Rica with a program that was affiliated with a U.S. community college. They used 529 funds to pay for tuition, fees, and even the homestay costs because the college considered that room and board. They kept all the paperwork, including the enrollment verification and the program syllabus showing it was for credit. Luna: The syllabus — that's a good tip. The IRS can ask for documentation that the expenses were qualified. So having a course description and a receipt for each expense is smart. Lucas: Absolutely. Now, what about a gap year that's just travel? Say your kid wants to go to Southeast Asia for six months and 'find themselves.' Can you use a 529 for that? Luna: I'm guessing the answer is no. Lucas: Flat no. Unless that travel is part of a structured educational program — like a study abroad through a university — it's not a qualified expense. The IRS looks for enrollment, not exploration. Luna: And there's also the issue of timing. Most 529 plans require that the funds be used in the same year as the expense. So if you're planning a gap year that spans two calendar years, you need to coordinate your withdrawals. Lucas: Great point. You can take a distribution in December for a program that runs into January, as long as the expense is paid in the same year. But if the program starts in January, you should wait until that year to take the distribution. Otherwise you risk having the distribution not match the expense year, which could trigger a penalty. Luna: So let's talk about another popular option: gap year programs that are actually run by colleges themselves. For instance, Princeton's Bridge Year Program, or Tufts' 1+4 program. Those are definitely qualified expenses because you're enrolled at the university. Lucas: Yes, those are the easiest. You're a registered student, you're paying tuition to the university, and the program is considered part of your academic track. So you can use 529 funds for tuition, fees, room, board, even a laptop if it's required. Luna: What about a gap year that includes an internship? Some programs combine travel with an internship, like the Intern Abroad programs. Lucas: If the internship is for credit through an eligible institution, then yes. But if it's a non-credit internship, the tuition paid to the program might not be qualified. However, if the program itself is offered by an accredited college, the entire cost — including the internship component — could be qualified. It really depends on how the program is structured. Luna: So the takeaway for parents: don't assume a gap year is automatically covered. You need to vet the program, check for college credit, and keep records. Lucas: And one more thing: the SECURE Act 2.0, which passed in 2022, expanded 529 plans to include apprenticeship programs and even student loan repayments. But it didn't specifically address gap years. So the old rules still apply. Luna: But there's been talk in Congress about allowing 529 funds for gap years more broadly. Anything new as of June 2026? Lucas: There have been a couple of bills introduced, but nothing has passed yet. The Gap Year Expansion Act was proposed in 2025 but stalled. So for now, we're working with the existing framework. Luna: And that framework means: if you want to use a 529 for a gap year, you need to find a program that's affiliated with an accredited college and that offers at least some credit. Then you can use the funds for tuition, fees, and room and board. Lucas: Exactly. And don't forget about the annual gift tax exclusion. If grandparents want to contribute to a 529 for a gap year, they can give up to $17,000 per year per beneficiary without triggering gift taxes. Or they can front-load five years' worth of contributions. Luna: That's a good reminder. So let's say a family has a 529 with $50,000 in it, and their child wants to do a gap year program that costs $20,000. They can use that $20,000 tax-free, and the remaining $30,000 stays in the plan for college. Lucas: Right. And if the gap year program is less than half-time, they can still use the funds for tuition and fees, but not for room and board — unless the program itself qualifies as a 'qualified education expense' under the less than half time rule. That rule allows room and board if the program is a 'qualified education expense' and the student is enrolled at an eligible institution. But it's tricky. Luna: I think the safest path is to use gap year programs that are explicitly designed for college credit. For example, the School for International Training, which is part of World Learning, offers gap year programs that are accredited. They even have a specific page on their website about 529 plans. Lucas: That's a great example. And for families who want to be extra cautious, they can contact the program directly and ask for documentation that the expenses are qualified under IRS rules. Many programs have financial officers who are familiar with 529 plans. Luna: So to sum up: you can use a 529 for a gap year, but you have to be intentional. It's not a free-for-all. Lucas: And if you do it right, it's a fantastic way to give your child a structured, educational experience before college — without losing the tax benefits of your 529 plan. Luna: Next week, we'll look at using 529 plans for your child's entrepreneurial ventures — because that's another area where the rules are evolving. Until then, happy saving.