Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / Using Your 529 Plan for Military Service Academies
Transcript
- Lucas: Let me ask you something — if your kid gets into West Point or the Naval Academy, a full scholarship covering tuition, you're probably thinking, well, I don't need that 529 plan anymore. But that might actually leave money on the table. Luna: Because room and board isn't covered by the scholarship, right? That's the part people forget. Lucas: Exactly. The military service academies — West Point, the Naval Academy, the Air Force Academy, the Coast Guard Academy, and the Merchant Marine Academy — all provide a fully funded education. Tuition, fees, books, even a laptop, all paid for. But room and board? That's a separate line item. And it can be substantial. Luna: What are we talking — a few thousand a year? Lucas: More than that. For the 2025-2026 academic year, the Naval Academy charges about $15,000 for room and board. West Point is similar, around $14,500. Multiply that by four years, you're looking at roughly $60,000. That's a qualified 529 expense under the tax code. Luna: So the 529 can pay that directly, tax-free, even while the midshipman is getting paid a monthly stipend? Lucas: Right. And here's the twist — those midshipmen actually receive a monthly salary. As of 2026, it's just over $1,300 a month. That's taxable income. So if you use 529 funds to cover room and board, you're effectively letting your child keep their own paycheck for personal expenses, rather than handing it back to the academy for housing. Luna: That's a smart hack. But does the IRS care that the student is also earning money? Lucas: No. The 529 rules are about what the money is spent on, not who else is paying. As long as the withdrawal is for qualified expenses — and room and board qualifies if the student is enrolled at least half-time — you're fine. The stipend doesn't change that. Luna: What about the Coast Guard Academy? I think their structure is a little different. Lucas: You're right. The Coast Guard Academy is a bit of an outlier because they don't charge any tuition, fees, or room and board — it's all covered. So there's really no qualified expense left for a 529 to pay. But the other four academies all have that room and board charge. Luna: So for a family with a 529, the playbook is: don't close the account when the appointment letter arrives. Keep it open, and use it for those housing costs. Lucas: Exactly. And there's another angle — if the 529 has more than what's needed for room and board, you can also use it for required computers, software, and even some travel. The IRS allows one trip per year for travel between the academy and home if it's a qualified expense. Luna: Wait, travel? I thought 529 funds can only pay for transportation if it's for study abroad or something specifically tied to the curriculum. Lucas: That's a common misconception. Actually, the tax code says 'expenses for transportation' are qualified if the student is enrolled at least half-time. The IRS has never strictly limited it to study abroad. So a flight home for winter break could be a valid expense, as long as the academy considers the student enrolled full-time. Luna: Interesting. I'd want to check with a tax advisor before relying on that, but it's good to know the code is broader than most people think. Lucas: Absolutely. Now, one thing to watch out for — if your child receives a full scholarship that covers room and board, then you can't double-dip. But at the service academies, the scholarship only covers tuition and fees. Room and board is separate, so it's fair game. Luna: And what about the Merchant Marine Academy? That one's a bit different because it's not strictly a military academy — it's under the Department of Transportation. Lucas: Right, but it's still a service academy for 529 purposes. The Merchant Marine Academy charges tuition for out-of-state students — about $20,000 per year — plus room and board. So a 529 can cover both tuition and housing there. And midshipmen there also receive a stipend. Luna: So for families with a child headed to a service academy, the key is to coordinate the 529 withdrawals with the academy's billing schedule. You don't want to take the money out too early. Lucas: Right. The best practice is to pay the academy directly from the 529 plan. The plan sends a check to the school for the room and board charges. That way, there's no ambiguity about the expense being qualified. And you keep the receipts just in case. Luna: Now, what if the 529 was set up in a grandparent's name? Does that change anything? Lucas: It does, slightly. Grandparent-owned 529s are counted as untaxed income on the FAFSA if the money is used for college costs. But since service academy students aren't eligible for federal financial aid — their education is already fully funded — the FAFSA impact is irrelevant. So a grandparent 529 is actually ideal here. Luna: That's a great point. No FAFSA worries when the full ride is already in place. Lucas: Exactly. And if the 529 has leftover funds after four years — maybe you over-saved — you can change the beneficiary to a sibling, or even use it for your own retirement education expenses. But for the service academy graduate, the most common scenario is that the 529 is just enough to cover room and board. Luna: If today's conversation helped you think about your own 529 strategy differently, you know, the way we keep these episodes ad-free is through listener support. If you found value, you can buy us a coffee at buy me a coffee dot com slash fexingo. It genuinely helps us keep the lights on. Lucas: And we appreciate every single one. Now, back to the academies — one more thing I want to flag: the five-year rule. If you're using a 529 to pay for room and board at a service academy, the expense must be incurred while the student is enrolled at least half-time. That's standard. But make sure the academy's billing statement clearly separates room and board from other fees. Luna: What if the academy lumps everything into a single 'midshipman fee'? Lucas: Then you need an itemized breakdown. The IRS wants to see that the expense is specifically for housing and meals. If the academy can't provide that, you might have a harder time justifying the withdrawal. Most academies do provide it, though. Luna: Good to know. So for a family planning ahead, how early should they start thinking about this? Junior year of high school? Lucas: Even earlier. The service academy application process starts in the spring of junior year, with congressional nominations due by the fall of senior year. So ideally, by the time your child is a sophomore, you should understand the cost structure of the academies you're targeting. That way, you can size your 529 contributions appropriately. Luna: And if the child doesn't get an appointment, the 529 is still flexible enough to use for a traditional college, so no risk there. Lucas: Exactly. It's a no-regret move. You save for the academy scenario, but if it doesn't pan out, the funds work for any other qualified school. That's the beauty of the 529. Luna: Are there any state-specific quirks? Some states offer tax deductions for 529 contributions, but if you're pulling the money out for a service academy, does the state treat it differently? Lucas: Generally, no. Qualified withdrawals are tax-free at the federal level, and most states follow suit. But a few states — like California — don't offer a deduction for contributions in the first place, so there's nothing to recapture. Other states might have rules about what counts as a qualified expense if the student isn't attending an eligible institution. But all the service academies are Title IV eligible, so they qualify. Luna: So the bottom line is: if your child gets into a service academy, your 529 still has a job to do. Don't cash it out. Lucas: Don't cash it out. Use it for room and board, travel, and maybe a computer. And if there's still money left, you can always change the beneficiary to a sibling or even yourself for a future graduate program. The 529 is one of the most flexible savings vehicles out there. Luna: Alright, next episode we're going to tackle a question we've gotten a lot: can you use a 529 to pay for a child's driver's ed course? That should be an interesting one. Lucas: It is. And the answer might surprise you. We'll see you then.