Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / Using 529 Plans for Your Childs Law School Tuition
Transcript
- Lucas: If your kid dreams of being a lawyer, a 529 plan can be a powerful tool to fund that dream. And the rules around graduate school have loosened up in the last few years. Luna: Yeah, I think a lot of people still think 529s are just for undergrad. But law school, med school, even PhD programs are fair game now. Lucas: Exactly. The SECURE Act of 2019 expanded the definition of qualified higher education expenses to include graduate and post-graduate programs. So law school tuition, fees, books, even room and board if the student is enrolled at least half-time — all eligible. Luna: And that's a big deal because law school is expensive. The average annual tuition at a public law school is around $30,000 for in-state students, and at private schools it can easily hit $60,000 or more. Lucas: Right. Let's anchor on a specific example. Say your child gets into a top-tier law school with a total cost of attendance around $70,000 a year. If you've been contributing to a 529 since they were born, you might have a balance of, say, $100,000 by the time they're ready for law school. Luna: That would cover about a year and a half, right? But law school is three years. Lucas: Correct. But you can still use the 529 for all three years — you just need to plan for it. And the earnings grow tax-free, and withdrawals are tax-free as long as they're used for qualified expenses. So even if you don't have enough to cover the full bill, it's still a huge advantage. Luna: And you can also use 529 funds to pay for bar exam prep courses, right? Lucas: Yes, the SECURE Act also clarified that bar exam preparation courses are a qualified expense. So that's another $2,000 to $3,000 you can cover tax-free. And don't forget — you can also use up to $10,000 per beneficiary to pay off student loans from a 529. Luna: That's a nice safety net. If your child takes out some loans, you can help them chip away at it with 529 money. Lucas: Exactly. But there's a nuance: the $10,000 limit is per beneficiary, not per account. So if you have multiple 529 accounts for the same child, the total loan repayment can't exceed $10,000. And that applies to loans for both undergrad and graduate school. Luna: So if they have $50,000 in loans, you can only use $10,000 from the 529. But the rest of the 529 money can go toward tuition and other costs. Lucas: Right. And one more thing — the beneficiary rules. You can change the beneficiary of a 529 plan to another family member without penalty. So if your child gets a full scholarship to law school, you can transfer the 529 to a sibling or even yourself for continuing education. Luna: That's a great point. A full ride makes the 529 less necessary, but you don't lose the money. You just redirect it. Lucas: Exactly. And if your child does take out loans, remember that the 529 can also be used for interest on those loans. The $10,000 limit applies to both principal and interest. So it's a little bit of flexibility. Luna: Let's talk about the tax benefits for a second. You get state tax deductions for contributions in many states. So if you're in a state with a deduction, that's an immediate return. Lucas: Yes. And the earnings grow tax-free. Over 18 or 20 years, that compounding makes a big difference. If you invest $5,000 a year from birth, at a 6% return, you'd have about $155,000 by age 18. That's a solid chunk for law school. Luna: And if you start later, say when they're 10, you'd have less time to compound. But still, any amount helps. Lucas: Absolutely. And remember, law school is three years, but you can use the 529 for the entire duration. So even if you only have $100,000, that pays for a year and a half, and you can supplement with other savings, scholarships, or loans. Luna: It's also worth noting that the 529 doesn't have to be used solely for law school. If your child decides not to go to law school, they can use it for any other qualified education. So it's not a risky bet. Lucas: Right. And if they don't go to college at all, you can change the beneficiary to a cousin, a niece, or even yourself. There's no penalty as long as the new beneficiary is a family member. Luna: So the key takeaway is: a 529 is a flexible tool for law school funding, but you need to plan for the full cost, not just part of it. Lucas: Exactly. And one more tip: if you're the grandparent and you have a 529 for your grandchild, be careful about how it affects financial aid. Grandparent-owned 529s used to be treated differently, but the FAFSA changes have simplified that. Now, distributions from a grandparent-owned 529 are reported as student income, which can reduce aid. So it's better to transfer ownership to the parent before withdrawing. Luna: That's a pro tip. So if you're a grandparent, talk to a financial advisor about the best way to structure it. Lucas: Yes. And let's not forget about the scholarships. If your child gets a scholarship, you can withdraw an equal amount from the 529 without paying the 10% penalty on earnings. You still pay income tax on the earnings, but no penalty. Luna: That's a good safety valve. So even if the scholarship covers everything, you're not stuck with a penalty. Lucas: Right. And if you overfund the 529, there's always the option to change the beneficiary to another family member. So it's hard to go wrong if you plan carefully. Luna: I think a lot of parents worry that they don't know how much to save. But with law school, you can look up the cost of attendance for specific schools online and work backward. Lucas: Absolutely. And you can use a 529 calculator to estimate your monthly contributions. Many state 529 plans offer free tools. So there's no excuse not to have a rough target. Luna: Lucas, I know we don't run ads on this show, and that's something I really appreciate. If our conversations help you think about a decision differently, you can support us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that keeps us independent and ad-free. We really value that. Luna: So back to law school — what about the LSAT prep costs? Can those be covered? Lucas: Unfortunately, LSAT prep courses are not considered qualified expenses. The IRS hasn't included standardized test prep in the definition. So you'd have to pay for those out of pocket. Luna: Good to know. So the big expenses are tuition, fees, books, and room and board. And bar prep is covered. Lucas: Exactly. And don't forget about computers and technology. If the law school requires a laptop, that can be a qualified expense. But it has to be required by the school. Luna: So no just buying a new MacBook because you want one. It has to be a requirement. Lucas: Right. And the same goes for software. If the school requires specific legal research software, that's covered. But general-purpose software is not. Luna: One more thing — what about living expenses during the bar exam period? Can the 529 cover rent while they're studying? Lucas: Not directly. The bar exam period is not considered a qualified enrollment period. So room and board during bar prep is not covered. But once they pass the bar and start working, you can use the 529 for loan repayment up to the $10,000 limit. Luna: So the window is narrow. But overall, a 529 is still one of the best ways to save for law school. Lucas: I'd say it's the best way for most families. The tax benefits are significant, and the flexibility is better than ever. If you're planning to send a child to law school, start a 529 as early as possible. Luna: And even if they don't go, you can always use it for yourself or another family member. It's a win-win. Lucas: Exactly. So don't let law school costs scare you. With a 529, you can make a big dent in the bill. Luna: Next time, we'll talk about using 529 plans for dental school. That's another area with specific rules. Lucas: Looking forward to it. For now, start saving.