Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Your Childs Study Abroad Program
Transcript
- Lucas: If your kid has ever come to you wide-eyed with a brochure for a semester in Florence or a summer program in Tokyo, you've probably had one question first — can I pay for this with the 529 plan? Luna: And the answer is yes, but with some important guardrails. Today we're looking at how 529 funds work for study abroad programs. Lucas: Right, because the number of U.S. students studying abroad has been climbing steadily — the Institute of International Education reported over 270,000 students in the 2023-24 academic year, and that's still below pre-pandemic peaks, so it's growing again. Luna: That's a lot of airfare and tuition. So what's eligible and what's not? Lucas: First rule: the study abroad program must be sponsored by or affiliated with an accredited U.S. college or university. If your daughter just signs up directly with a language school in Paris that has no U.S. affiliation, that's not a qualified withdrawal. Luna: But if her home university has an exchange agreement with a foreign institution, then it's fair game? Lucas: Exactly. And that's the most common route — about 65 percent of study abroad students go through a program run by their own U.S. school. In that case, the 529 treats it almost like a domestic semester. Luna: So what expenses specifically are qualified? Lucas: Tuition and fees — obviously. But also room and board, provided the student is enrolled at least half-time. That includes dorm fees, off-campus rent, meal plans. And the Tax Cuts and Jobs Act of 2017 added a big one: airfare. Luna: Wait, that was a change? Before 2018, you couldn't use 529 funds for flights? Lucas: Correct. Before the TCJA, qualified expenses were limited to tuition, fees, books, supplies, and room and board — but only if the student was enrolled at least half-time at an eligible institution. Airfare wasn't explicitly included. The TCJA expanded the definition to include expenses for a study abroad program that is approved for credit by the eligible institution. That means airfare, health insurance, even a local transit pass can be covered. Luna: That's a huge practical win. Let's say a student is going to the University of Sydney for a semester through a U.S. university's program. What's the full list of things they could pay for tax-free? Lucas: Let's build that list. Tuition at the University of Sydney — covered. Round-trip airfare from LAX to Sydney — covered. On-campus housing or a shared apartment near campus — covered. Required health insurance, which is mandatory for international students in Australia — covered. Even a laptop if the program requires it for coursework — covered, same as domestic. Luna: What about meals? If they're in an apartment without a meal plan, can you still pay for food? Lucas: Yes, but with a limit. Room and board expenses are capped at the school's official cost of attendance for room and board, or the actual amount charged if the student lives in school housing. For students living off campus, the IRS says you can use the school's published allowance for room and board. So you can't just pay unlimited grocery bills — you need to keep within that figure. Luna: That makes sense. And how does the foreign school get classified? Does it have to be on some list? Lucas: The foreign institution must be eligible to participate in the U.S. federal student aid programs — basically, it needs a Title IV code. But if the program is through a U.S. school, that U.S. school is the eligible institution, and the foreign component is just part of their program. So you're usually fine. Luna: What about a student who takes a gap year and wants to study abroad independently, not through their home university? Lucas: Trickier. If they're not enrolled at an eligible U.S. institution during that semester, the withdrawal would not be qualified. You'd owe income tax on the earnings and a 10 percent penalty. So the key is to keep the enrollment link intact. Luna: What about currency exchange? Any gotchas there? Lucas: Good question. You can withdraw from the 529 in U.S. dollars, then convert to the local currency. The IRS doesn't have a specific rule on exchange rates, but you should document the conversion rate and keep receipts for the foreign expenses. If you're audited, you need to show that the U.S. dollar amount withdrawn matches qualified expenses at the time of payment. Luna: So record-keeping is even more important when there's a foreign currency involved. Lucas: Absolutely. Keep the program acceptance letter, the itemized bill from the foreign school, proof of payment, airline receipts, housing contract, insurance confirmation. Everything in a folder. And remember — the withdrawal must be made in the same tax year as the expense, or within a reasonable window. Luna: Let's talk numbers. What's a typical semester abroad cost? Lucas: The Institute of International Education says the average cost for a semester abroad — including tuition, room and board, airfare, and personal expenses — is around $18,000 to $25,000. That's roughly the same as a semester at a public in-state university. But if the foreign school charges higher tuition, the 529 covers that too, because it's based on the actual cost of attendance at the host institution. Luna: So a student going to a top UK university like Oxford could have a much higher tuition cost, and the 529 would still cover it. Lucas: Exactly. As long as the program is approved by the U.S. school, the sky's the limit on tuition. Room and board still have the cost of attendance cap, but tuition is whatever the foreign school charges. Luna: One more thing — what if the student receives a scholarship or grant that covers part of the cost? Does that affect the 529 withdrawal? Lucas: It does. You can't double-dip. If a scholarship pays for tuition, you cannot also use 529 funds for that same tuition. But you can use the 529 for other qualified expenses — room and board, airfare, books — as long as the total 529 withdrawal plus scholarship doesn't exceed your total qualified expenses. The scholarship also allows you to withdraw an equal amount of 529 earnings penalty-free, though you'd still owe income tax on the earnings portion. Luna: So the scholarship actually gives you a little flexibility. Lucas: Yeah, it's a common strategy — use the scholarship for tuition, then use the 529 for the other costs. Or, if the scholarship covers everything, you can take a non-qualified withdrawal on the earnings without the 10 percent penalty, but you still pay income tax on the growth. Luna: Good to know. Let's talk about the timing. When should a family start planning for a study abroad semester from a 529 perspective? Lucas: Ideally, years before. If you know your child might want to study abroad, you can overfund the 529 slightly to account for the extra airfare and living expenses. But practically, the key moment is when the student applies to the program. That's when you confirm the program's eligibility and get the cost breakdown. Luna: And if they decide last minute? Can you still use the 529? Lucas: Yes, as long as the expense is qualified and occurs while the student is enrolled. You can even reimburse yourself from the 529 after paying out of pocket, as long as the reimbursement happens in the same tax year or shortly after — the IRS has said you can't wait years. So save those receipts. Luna: What about a student who studies abroad for a full academic year? Lucas: Same rules apply. Full year is fine. The half-time enrollment requirement still holds — typically at least six credits per semester. Most study abroad programs meet that. Luna: I think a lot of parents worry that study abroad will be way more expensive than staying home, but the 529 can make it much more manageable. Lucas: Yeah, and the experience can be transformative. But the rules are specific, so planning ahead is essential. And speaking of planning — this show is possible because of a few listeners who support it through buy me a coffee dot com slash fexingo. We keep it ad-free because of that, and it helps us cover topics like this in depth. Luna: Yeah, it's really simple — no subscription, no ads, just a way for people who find value in the show to keep it going. If that's you, we appreciate it. Lucas: Alright, back to study abroad. One more thing to watch out for: some 529 plans have their own rules on foreign schools. Most state plans are flexible, but it's worth checking with your plan administrator before withdrawing a large sum. Luna: Good point. And let's not forget that if you have multiple children, you could change the beneficiary to another child if the first one decides not to study abroad. Lucas: Right, that's always an option. So to wrap up: yes, you can use 529 funds for study abroad, but the program must be affiliated with an accredited U.S. school. Qualified expenses include tuition, room and board, airfare, insurance, and required supplies. Keep meticulous records, especially with foreign currency. And plan ahead to make sure the enrollment link is solid. Luna: And if you're considering a study abroad semester for your child, start the conversation early — with your child, with the study abroad office, and with your 529 plan provider. Lucas: Next episode, we'll look at using 529 plans for graduate school abroad — different rules, different considerations. See you then.