Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Your Childs Study Abroad Semester
Transcript
- Lucas: So you've been diligently saving in a 529 plan for years, and now your kid comes home and says, 'Mom, Dad, I want to spend next semester in Barcelona.' Panic sets in — can you use that 529 money? Short answer: yes, but with some very specific rules. Luna: I love this topic because it's one of those hidden superpowers of 529 plans. A lot of families assume study abroad is off-limits. Lucas: Exactly. The IRS treats a study abroad program the same as a domestic program, provided the student is enrolled at least half-time at an eligible educational institution. That includes most foreign universities that participate in your US school's study abroad program. Luna: So the key word there is 'eligible.' Not every language school or gap-year program qualifies. Lucas: Right. The institution needs to be accredited and eligible to participate in federal student aid programs. Your home university's study abroad office can usually tell you if the foreign school qualifies. But let's say it does — what can you actually pay for? Luna: Tuition, obviously. But I think the bigger question is room and board. Lucas: Tuition is straightforward. Room and board is where it gets interesting. If the student lives in university-owned housing abroad — like a dorm or a residence hall run by the foreign school — that's a qualified expense. But if they rent an apartment off campus, the rules tighten. The student must be enrolled at least half-time, and the amount you can withdraw is capped at the school's official 'cost of attendance' for room and board — not necessarily what you actually pay. Luna: That's a critical gotcha. So you could over-withdraw and trigger a penalty on the excess. Lucas: Exactly. Let's use a real example. Say your child does a semester at the University of Barcelona through a US program. Tuition is $8,000. The university's cost of attendance lists room and board at $6,000 for the semester. But you find a great apartment for $7,000. You can only withdraw $6,000 for room and board from the 529 — the extra $1,000 would be a non-qualified distribution. Luna: And that $1,000 gets hit with taxes plus a 10% penalty on the earnings portion. Lucas: Ouch. But there's good news: travel expenses. A 529 can cover airfare to and from the study abroad destination. That's a big one. Luna: Wait, really? I thought travel was not a qualified expense. Lucas: The rule says 'expenses for travel abroad' are qualified if the student is enrolled in a study abroad program that's part of their degree. The IRS specifically called this out in Notice 96-47. One round-trip flight per academic term? Covered. Luna: That changes the math significantly. A round trip to Barcelona could be $800 to $1,200. Using 529 money for that is tax-free. Lucas: Right. But local transportation once you're there — buses, metro passes, taxis — those are not qualified. The exception is if the school requires a specific local transit pass as part of the program fee, then it could be bundled into the cost of attendance. Luna: What about things like a cell phone plan or a local SIM card? I've seen parents ask that. Lucas: Not directly. Unless the student needs it for internet access to attend online courses — say a hybrid program — then you could argue it's a required technology expense. But that's a stretch. Better to pay for that out of pocket. Luna: So the safest route: tuition, university housing, and airfare. Everything else gets murky. Lucas: And that's exactly why we need to talk about record-keeping. If you're going to use a 529 for study abroad, save every receipt, every flight confirmation, every housing contract. The IRS doesn't audit often, but if they do on this, you want a paper trail. Luna: It's also worth noting that the 529 plan itself may have its own rules. Some state plans restrict foreign institutions, even if the IRS allows them. So check with your plan administrator. Lucas: Great point. The federal rules are one thing; your specific state plan might be another. For example, some plans only allow withdrawals for schools that have a federal school code, and not every foreign university has one. Luna: And if you're contributing to a 529 and your child does study abroad, you might also qualify for a state income tax deduction on those contributions, depending on your state. Lucas: That's the double benefit: tax-free growth on the contributions, and potentially a state tax break upfront. But let's talk numbers. Say you're in the 22% federal bracket. You save $2,000 a year in a 529 for 10 years. That grows to about $24,000 at 6% return. If you withdraw $5,000 for a semester abroad — all qualified — you've saved $1,100 in taxes compared to a taxable account. Luna: That's real money. And if you'd used a regular savings account, you'd also pay capital gains on the earnings. Lucas: Right. So the 529 is clearly the better vehicle. But I want to address the common fear: 'What if my kid decides not to study abroad? Then I've locked up money in a 529 for nothing.' That's a risk, but you can always change beneficiaries — to a sibling, a cousin, even yourself for certain programs. Luna: Or you can roll over up to $35,000 into a Roth IRA for the beneficiary starting in 2024, thanks to Secure 2.0. That's a safety valve. Lucas: Exactly. So there's very little downside to using a 529 for study abroad. The upside is huge. I've seen families fund entire semesters this way. Luna: If today was actually useful to you, the way these stay ad-free is listener support. You can head to buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that helps us keep the conversations going without any ad interruptions. We really appreciate it. Luna: Now, back to the numbers. One thing I want to highlight: the 'cost of attendance' figure that the school provides — you typically find it on the financial aid page. That's your ceiling. Lucas: And it varies wildly. For the University of Barcelona program, cost of attendance might list room and board at $6,000, but for a program in London, it could be $10,000. The 529 can cover that higher amount. Luna: So the more expensive the city, the more you can withdraw tax-free. That's a weird incentive. Lucas: It is, but it's the rule. Also, if the program includes field trips or cultural excursions that are mandatory and part of the curriculum, those costs could be covered as 'fees' under tuition. Luna: But not optional weekend trips to Ibiza, I'm guessing. Lucas: No, those are on the student. But if it's a required excursion for a course — like a history class visiting a Roman ruins site — then it's fair game. Luna: I also want to mention that some study abroad programs are run by third-party providers, not the university itself. Does that matter? Lucas: It can. If the program is administered by a separate organization but the student receives academic credit from their home university, it should be fine. But if it's a standalone program not affiliated with an eligible institution, the 529 won't work. Luna: So the golden rule: make sure the study abroad program is for credit at an accredited US school. That's the ticket. Lucas: And talk to the financial aid office at your home university. They deal with this all the time. They can tell you exactly what qualifies and what doesn't. Luna: One last thing: timing. Withdrawals should be made in the same calendar year the expenses are incurred. If you pay the flight in December but the semester starts in January, the withdrawal for the flight should be in December. Lucas: That's a pro tip. The IRS examines the year of the distribution, not the semester. So if you're planning a spring 2027 semester abroad, you might have expenses in late 2026 — deposits, flights — and those should be taken in 2026. Luna: Great advice. So study abroad is absolutely doable with a 529. Just do your homework first. Lucas: Exactly. And if you want more details on any of this, including links to IRS publications, check the show notes. That's it for this episode — we'll be back with another angle on college savings next time.