Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Fund Your Child's Dorm Room and Off-Campus Housing
Transcript
- Lucas: You know, a lot of parents I talk to open a 529 plan thinking it covers tuition and maybe a laptop, but they're not sure about housing. Can they use that money to pay for their kid's dorm room, or an off-campus apartment? The answer is yes, but the rules are more specific than most people realize. Luna: Right, because the IRS doesn't just say 'housing counts.' There are limits tied to something called the cost of attendance, right? Lucas: Exactly. The key is that room and board is a qualified expense only up to the amount the college lists as its 'cost of attendance' for housing. That number is published by every school that participates in federal financial aid. For example, the University of Michigan for the 2025-2026 academic year lists a standard room and board allowance of about $13,856 for students living on campus. If your child lives off campus, the school typically has a separate allowance, often a bit lower. Luna: And if your actual rent is higher than that allowance, the excess isn't qualified. So if their apartment costs $15,000 a year, you can only use 529 funds for $13,856 of it—the rest would be a non-qualified withdrawal, subject to taxes and a 10% penalty on the earnings portion. Lucas: That's the trap. And it catches people because they think 'I paid rent, so it's a school expense.' But the IRS says the ceiling is the school's official cost of attendance figure. You can find that number on the school's financial aid website under 'estimated cost of attendance.' For off-campus students, it's usually broken out separately from tuition and fees. Luna: Let's talk about the logistics. If your kid lives in a dorm, paying the university directly with a 529 distribution is straightforward. But off campus, you're paying a landlord. How does the 529 work there? Lucas: Good question. For off-campus housing, you typically take a distribution from the 529 plan into your own bank account, then pay the landlord. But you need to keep records. The IRS requires that the student be enrolled at least half-time, and the housing must be rented during an academic period. So summer rent when no classes are in session probably doesn't qualify. You also need to keep the lease, receipts for rent payments, and the university's cost of attendance documentation. Luna: And a lot of parents don't realize that utilities and internet aren't included unless they're part of the rent. If your kid pays electricity separately, that's not a qualified expense. Lucas: Right. Only rent and a meal plan if it's through the school. Groceries you buy at the store are not qualified, even if you're feeding your student. That's a common misunderstanding. But the good news is that room and board is one of the largest expenses you can pay from a 529, so it really stretches the value of the account. Luna: And if this kind of practical breakdown helps you, here's a thought: these episodes stay ad-free because listeners who find value occasionally support the show. If today's conversation saved you from a 10% penalty down the road, you can buy me a coffee at buy me a coffee dot com slash fexingo. It's a simple way to keep these deep dives coming. Lucas: That's a great point. And speaking of staying penalty-free, let's talk about the timing of when you take the distribution. You can only take a distribution in the same year the expense is incurred. If you pay rent in September 2026 for the fall semester, you need to take the 529 distribution in 2026. You can't take it in 2025 and hold the cash. Luna: Right, the IRS matches the distribution to the year of the expense. And you can actually reimburse yourself after paying out of pocket, as long as you do it in the same calendar year. So if you paid the landlord from your checking account in August, you can take a 529 distribution in December to reimburse yourself, as long as the expense was in 2025. Lucas: Exactly. And you need to keep the documentation showing the payment date and the academic period. A lot of parents find it easier to just take a distribution each semester once they know the rent and meal plan costs. That way you don't have to track every single receipt. Luna: Let me ask about a specific scenario. What if your child lives at home and commutes to a local college? Can you use 529 funds for room and board then? Lucas: Interesting edge case. For students living at home, the room and board allowance is typically the smallest. The IRS says the qualified expense is the cost of room and board as determined by the school for students living with parents, which is usually just a small allowance—maybe $3,000 to $5,000 per year. That accounts for the fact that you're not paying separate rent, but they recognize there's still a cost to housing you. Luna: So if your school's cost of attendance for commuters is $4,000 for room and board, you can only withdraw that much from the 529 for housing, even if your actual expenses are higher. Lucas: Correct. And you'd need to document that the student is indeed living at home. Some families try to claim a higher amount by saying 'we pay our child rent,' but the IRS looks at whether the student is actually paying fair market rent to the parents. It's a gray area, and I'd be cautious. Most tax professionals recommend sticking to the school's published figure for commuters. Luna: What about students in graduate school or professional programs? The same rules apply? Lucas: Same rules, but the cost of attendance for grad students is often higher because they're considered independent. For example, the University of Michigan Law School's cost of attendance for the 2025-2026 year includes over $20,000 for room and board. So a 529 can cover a much bigger chunk of housing for a grad student than for an undergrad living in a dorm. Luna: That's a great point. And since grad school typically has higher tuition too, the 529 is even more valuable. Lucas: Now, let's talk about a practical example. Say your child is a sophomore at Michigan State, living off campus with two roommates. Their share of rent is $700 a month, and they have a meal plan through the school that costs $1,200 per semester. MSU's off-campus room and board allowance for 2025-2026 is about $12,500. So the total rent for the academic year is $5,600, plus two semesters of meal plan at $2,400, total $8,000. That's well under the $12,500 limit, so all $8,000 is a qualified expense. Luna: And if they also buy groceries, that's not included. But if the meal plan is through the school, it counts. So the key is to funnel as much as possible through the school's meal plan if you want to use 529 funds. Lucas: Exactly. And if the student lives in a dorm, the school's room and board charge is typically one lump sum. You just pay it with a 529 distribution made out to the school. That's the cleanest way to avoid any record-keeping headaches. Luna: One more thing: what about summer housing? If a student takes summer classes, is that qualified? Lucas: It is, as long as the student is enrolled at least half-time in summer courses. The cost of attendance for the summer term is usually lower, but you can still use 529 funds for housing during that period. Just get the summer cost of attendance from the school's financial aid office. Luna: So the bottom line: 529 plans are a powerful tool for covering housing, but you need to know the school's cost of attendance, keep good records, and only take distributions in the year the expense is incurred. Lucas: And never exceed the school's published allowance. That's the rule that will keep you safe from taxes and penalties. If you're unsure about a specific situation, consult a tax professional or the 529 plan administrator. But for most families, room and board is the second biggest qualified expense after tuition, so it's well worth understanding. Luna: I think that's a solid roadmap. Next time we can talk about how to handle the paperwork if you get audited, but for now, I hope listeners feel more confident about using their 529 for housing. Lucas: Absolutely. And remember, the specific numbers change each year, but the principles stay the same. Check your school's cost of attendance, keep receipts, and enjoy watching your 529 pay for a roof over your student's head.