Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / Using 529 Funds for Your Childs Online Degree Program
Transcript
- Lucas: So you've got a kid who's decided college is for them, but they don't want the dorm and dining hall experience. Maybe they're working part-time, or they just learn better online. Can a 529 plan pay for that? Luna: Short answer is yes — but there are a few guardrails. And the key word here is 'accredited.' Lucas: Exactly. The IRS rule is surprisingly simple: the school has to be eligible to participate in federal student aid programs. That's the same standard whether it's a brick and mortar campus or a fully online operation. So if the online program is run by an accredited, Title IV–eligible institution, tuition and fees are a qualified expense. Luna: And that covers a lot of ground. Think Arizona State University's online campus, University of Florida Online, Southern New Hampshire University — these are all legitimate, accredited schools. Lucas: Right. But it doesn't cover just any online course. If your kid signs up for a coding bootcamp that's not affiliated with an accredited college, that's a different story. We've covered coding bootcamps in a previous episode — Episode 90 — but those are only covered if the bootcamp is itself an eligible institution. Most standalone bootcamps aren't. Luna: So let's say your child is pursuing a bachelor's in computer science through ASU Online. What exactly can you pay for with 529 funds? Lucas: Tuition and fees are the big one. That's straightforward. But then there's the question of room and board. For online students living at home, the IRS generally considers them to be living with parents, so room and board isn't a qualified expense. However, if the student is enrolled at least half-time and lives off-campus but not with parents, you can use up to the school's published cost of attendance for room and board. Luna: That's a nuance a lot of families miss. They assume because it's online, no room and board is covered. But if the student moves into their own apartment, they can still access that allowance — as long as they're half-time. Lucas: Precisely. And computers? That's another common question. The IRS allows a computer or peripheral equipment if it's required for enrollment. For an online program, that's almost always the case. So a laptop, printer, even software if it's required — those can be qualified expenses. Just keep the receipt and the school's policy stating it's required. Luna: What about internet access? That seems like a gray area. Lucas: It is gray. The IRS hasn't issued explicit guidance on internet service as a standalone expense. But some families successfully include a portion of their internet bill if the student needs it for coursework. The safer route is to treat it as part of the computer expense if the school bundles technology fees. Otherwise, I'd avoid it unless you're prepared to defend it in an audit. Luna: Let's talk about scholarships. If your online student gets a scholarship, can you pull 529 funds out penalty-free up to the scholarship amount? Lucas: Yes. You can take a non-qualified withdrawal up to the amount of the scholarship without the 10% penalty. You still owe income tax on the earnings portion, but no penalty. It's a useful safety valve if the scholarship covers tuition and you've already funded the 529. Luna: So the key takeaway for online degrees: make sure the school is accredited and Title IV–eligible. Then tuition, fees, required computers, and possibly room and board if the student is half-time and not living with parents, all qualify. Lucas: Exactly. And one more thing — documentation. Keep records of enrollment verification, the school's cost of attendance, and receipts. The IRS doesn't require you to submit them with your tax return, but if they audit you, you'll need to show the expenses were qualified. Luna: I think this is a really underappreciated angle on 529 plans. Online education is only growing, and the plans are flexible enough to accommodate it. Lucas: Absolutely. And if you've found these episodes helpful — we deliberately keep this show ad-free because we think the information should speak for itself. If you want to support that choice, there's a link: buy me a coffee dot com slash fexingo. No pressure, just an option for folks who find value here. Luna: Yeah, it's a small way to keep the show going without interrupting the conversation. Appreciate anyone who does. Lucas: Alright, back to the rules. One more thing that trips people up: what if your online student needs to take a lab? Some online programs have in-person weekend labs. The lab fees are qualified if they're required. Luna: Good point. And what about textbooks? Those are always qualified for any degree program, online or not. Lucas: Right. Textbooks, supplies, equipment — all fair game as long as they're required. The IRS doesn't care if the book is digital or physical. So e-books, access codes, online subscriptions for course materials — all covered. Luna: Let's talk about timing. When do you take the distribution? Same rules apply: the withdrawal must happen in the same tax year as the expense is incurred. Lucas: Correct. You can pay out of pocket and reimburse yourself from the 529 later, as long as it's within the same year. And if you're using the 529 to pay directly, the school should have a process for that. Many online programs accept electronic payments from 529 plans. Luna: So to sum up: online degrees are absolutely a valid use of 529 funds. Just check accreditation, keep records, and be careful with room and board and internet. Lucas: And if your child ends up not finishing the degree? You can change the beneficiary to another family member, or if they get a scholarship, use the penalty-free withdrawal. The 529 stays flexible. Luna: I think that's the real message: 529 plans are more adaptable than most people realize. Online education is just one more way to use them effectively. Lucas: Absolutely. Next time we'll talk about using 529 funds for graduate school — but online graduate programs follow many of the same rules we covered today.