Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Can Pay for Your Childs Online College Courses
Transcript
- Lucas: So Luna, you know how we've talked about 529 plans covering everything from coding bootcamps to study abroad programs. Luna: Right, it's almost like the swiss army knife of education funding at this point. Lucas: Exactly. But there's one use case that I think a lot of parents overlook, and it's actually become more relevant since the pandemic shifted so many classes online. Luna: You're talking about using a 529 plan to pay for online college courses, aren't you? Lucas: That's exactly it. And before you say 'well, that's just tuition,' it's worth digging into the specific IRS rules around what qualifies when the course is delivered remotely. Luna: Yeah, I think a lot of people assume that if the student isn't physically on campus, the expenses might not count. But that's not the case. Lucas: Right. The IRS defines qualified higher education expenses as tuition and fees required for enrollment at an eligible educational institution. And 'eligible institution' includes any college or university that participates in federal student aid programs, regardless of whether you attend in person or online. Luna: So as long as the school is accredited and the course is credit-bearing, you're good. Lucas: Exactly. And that opens up some interesting strategies. For example, say your kid is still in high school but wants to get a head start on college credits. Luna: Like dual enrollment programs, but paid for with a 529 plan. Lucas: Right. Many states allow you to use 529 funds for dual enrollment if the course is offered by an eligible college. But even if your child is already in college, taking a few online courses from a different institution can save money. Luna: Let's talk about a concrete example. I was looking at Arizona State University's online program. Their tuition for a full-time online student is about ten thousand, eight hundred dollars a year. Lucas: That's significantly less than the average in-state tuition for a four-year public university, which is around eleven thousand dollars, but for online you save on room and board, transportation, all that. Luna: And those room and board costs aren't covered by a 529 plan unless the student is enrolled at least half-time. So online programs can be a better fit for the 529 rules in some cases. Lucas: Before we go deeper, I want to mention something quick. If you're finding these conversations useful, you can support the show at buy me a coffee dot com slash fexingo. It's a couple bucks a month, and it genuinely helps us keep the podcast ad-free and focused on practical advice. Luna: Yeah, we really appreciate the listeners who chip in. It makes a difference, and it keeps us independent. Lucas: So back to online courses. Another angle is taking a class from a different university to fulfill a requirement. Say your kid needs a specific course that's not offered at their home school. Luna: I've seen that a lot with prerequisites for competitive majors. They'll take a calculus or statistics class online through another accredited institution. Lucas: And as long as that course is required for their degree, the 529 plan can pay for it. Even if the course is delivered entirely asynchronously, even if it's a self-paced program. Luna: The key is that the school must be eligible, and the expense must be tuition and fees, not extras like a laptop or internet service. Lucas: Right. You can't use 529 funds for a computer, even if it's needed for online classes. That's a common misconception. The IRS specifically excludes computers, internet access, and software from qualified expenses unless the school requires it for all students. Luna: But you can pay for required online lab fees, proctoring fees, things like that. Lucas: Exactly. And the SECURE Act 2.0, which passed in late 2022 and took effect in 2023, actually expanded 529 benefits to include apprenticeship programs and up to ten thousand dollars in student loan repayment. But it didn't change the online course rules. Luna: Those rules were already pretty flexible. I think the real opportunity here is for families who want to minimize total college costs. Lucas: Right. If your child can knock out a year's worth of general education requirements through a community college's online program, you could save tens of thousands of dollars. And as long as the credits transfer to their target university, the 529 plan can cover that tuition. Luna: But you need to check the transfer policies. Not all credits transfer, especially if the online school is not regionally accredited. Lucas: That's a really important point. Make sure the online institution is accredited by an agency recognized by the Department of Education. Otherwise, you might pay for courses that don't count toward the degree. Luna: And if the course doesn't count, then it's not a qualified expense. You'd owe taxes and a ten percent penalty on the withdrawal. Lucas: So it's not a situation where you can just take any random online class. It has to be at an eligible institution and required for the degree or enrollment. Luna: Let's talk about fees. Many online courses have technology fees or distance learning fees. Are those covered? Lucas: Yes, if the fee is required for all students in the course. The IRS says that fees for 'books, supplies, and equipment' are only qualified if the items are required for the course. But a mandatory technology fee that's charged to all online students would be covered. Luna: What about subscription-based platforms like Coursera or edX? Those are not accredited institutions, so they don't qualify. Lucas: Right. Even if they partner with a university, the platform itself is not an eligible institution. You'd need to enroll directly through the university's online program to use 529 funds. Luna: So for example, if a student takes a course through the University of Illinois's online campus, that's fine. But if they take the same course on Coursera, even if it's the same content, it's not qualified. Lucas: Exactly. And the amount you can use is limited to the tuition and fees charged by the university. If the course is free on Coursera but you pay for a certificate, that certificate fee is not a qualified expense. Luna: Okay, so let's say a parent is already using a 529 plan for their child's in-person college, but the child decides to switch to an online program to save money. Can they just start using the 529 for the online tuition? Lucas: Absolutely. There's no restriction on switching from in-person to online. As long as the institution is eligible, you're good. And you can even change beneficiaries if the original beneficiary doesn't need the funds. Luna: What about graduate-level online courses? Can you use a 529 for a master's degree online? Lucas: Yes, 529 plans cover graduate and professional degree programs too. So if your child wants to get an online MBA from a regionally accredited school, the 529 plan can pay for it. Luna: That's a huge benefit. I think a lot of people still think 529 plans are only for undergraduate education. Lucas: They've evolved a lot. The Tax Cuts and Jobs Act of 2017 expanded them to cover K-12 tuition, and the SECURE Act added apprenticeships and student loans. But the core — higher education expenses — has always included online learning. Luna: So the key takeaway: if your child is taking a course from an accredited college or university, delivered online, for credit, the 529 plan can cover tuition and required fees. Lucas: And it's worth noting that the student doesn't need to be enrolled full-time. Even a single online course qualifies, as long as it's at an eligible institution. Luna: That's perfect for high school students taking dual enrollment, or for college students who need to take a summer class online. Lucas: Exactly. So if you're planning for college costs, don't overlook the flexibility that online courses offer. They can be a cost-effective way to earn credits, and your 529 plan is ready to help pay for them. Luna: And as always, check with your plan's administrator to confirm that the specific course qualifies, because state plans can have their own rules on top of federal rules. Lucas: Great advice. That's all for today. Thanks for listening, and we'll see you next time.