Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Can Cover Your Childs Medical School Costs
Transcript
- Lucas: If you have a kid who wants to be a doctor, you're looking at a price tag that can easily top $250,000 just for medical school tuition. And that's before living expenses, books, or the interest on loans they'll take out during residency. Luna: That number is staggering. And I feel like most parents assume 529 plans are only for undergrad or maybe K through 12 tuition. But medical school is absolutely a qualified expense, right? Lucas: Right. The IRS defines qualified higher education expenses to include any college, university, vocational school, or graduate program that's eligible for federal student aid. Medical school qualifies—both allopathic and osteopathic programs, and even dental school or veterinary school fall under the same umbrella. Luna: So what exactly counts as a qualified expense for med school? Is it just tuition? Lucas: Tuition and fees are the obvious ones. But also books, supplies, and equipment—think stethoscopes, lab coats, even a laptop if the school requires it. And perhaps the biggest one: room and board, as long as the student is enrolled at least half-time. For a med student living off campus, that can cover rent, utilities, and groceries up to the school's official cost of attendance allowance. Luna: That's huge. Because the cost of attendance at a place like Harvard Medical School is over $100,000 a year now, including living expenses. If you've got a 529 plan funded for undergrad, you could roll unused funds into covering med school instead. Lucas: Exactly. And the SECURE Act of 2019 and the SECURE 2.0 Act of 2022 have made 529 plans even more flexible. You can now use up to $10,000 in 529 funds to pay off student loans for the beneficiary. That includes medical school loans. And there's a new provision allowing you to roll over unused 529 funds into a Roth IRA for the beneficiary, up to a lifetime limit of $35,000, subject to annual contribution limits. Luna: Wait, so if your kid finishes med school and still has some money left in the 529, they can put it into a Roth IRA? That's a huge deal for residents who typically have low income and can't save much. Lucas: Exactly. The 529 has to have been open for at least 15 years, and the rollover counts toward the annual Roth contribution limit. But it's a fantastic way to give a future doctor a head start on retirement savings. Now, the question a lot of parents ask is: should I prioritize saving for undergrad or for medical school? Luna: And what do you tell them? Lucas: I usually say a dual-account strategy can work. You might have one 529 for the child's undergrad, and a separate one—maybe in your own name with the child as beneficiary—designated for graduate school. That way you avoid the concern of overfunding one account. But the key is to start early, because the power of compound growth over 18-plus years is what makes a 529 plan so effective. Luna: It's also worth noting that medical schools are increasingly expensive. According to the Association of American Medical Colleges, the median debt for medical school graduates is around $200,000. So even if you save $50,000 in a 529, that's still a huge help. Lucas: And if you don't use all of it, you've got options: the Roth rollover, or you can change the beneficiary to another family member—a sibling, a cousin, even yourself if you decide to go back to school. The flexibility is really remarkable. Luna: One thing I want to clarify: can you use 529 funds for medical residency? Because residency is technically a training program, not a degree-granting program. Lucas: Great question. The IRS hasn't explicitly addressed residency programs as qualified expenses for 529 plans. However, if the residency is part of a graduate medical education program at an eligible institution, some argue that it could qualify under the 'fellowship' category. But generally, I'd advise caution. Most financial planners recommend using 529 funds for medical school itself, and then using the student loan repayment option—that $10,000 limit—for loans taken out during residency. Luna: That makes sense. So the strategy would be: fund undergrad with one pot, use the 529 for med school tuition and living costs, and then if there's loan debt after residency, use the $10,000 student loan benefit. Lucas: Right. And remember, the student loan repayment benefit is per beneficiary, not per loan. So it's a $10,000 lifetime limit. But if you have multiple 529 accounts for the same beneficiary, you can still only use $10,000 total. Luna: Before we move on, I want to take a quick moment to mention something. Our shows here at Fexingo are completely ad-free, and listeners often ask how we keep it that way. It's because of the people who choose to support us directly. If you find these episodes useful, you can help keep them free of commercials by visiting buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a simple way to say 'this is valuable to me.' And we really appreciate it. No pressure, just if it works for you. Luna: Exactly. Now, back to medical school. One thing I've seen is that parents sometimes worry about the impact of 529 funds on financial aid. How does that play out for med school? Lucas: For graduate and professional school, the Free Application for Federal Student Aid, or FAFSA, treats parent-owned 529 plans differently. For graduate students, only the student's income and assets are considered. So if the 529 plan is owned by the parent, it doesn't count as the student's asset. That's a big advantage compared to undergrad, where parental assets are factored in. Luna: So parents can save in their own name without penalizing their child's eligibility for federal loans or work-study? Lucas: Exactly. And medical school financial aid is mostly loans anyway, not grants. So the 529 is really about reducing the debt burden, not about maximizing aid. The less your kid has to borrow, the better. Luna: What about state tax benefits? If you live in a state that offers a deduction for 529 contributions, does that apply even if the funds are used for medical school? Lucas: Yes, in most states. As long as the 529 plan is from that state and the contributions are within the deductible limit, you get the state tax benefit regardless of whether the money is used for undergrad or graduate school. Just be aware that if you use the funds for a non-qualified expense, the earnings portion is subject to federal income tax and a 10 percent penalty. Luna: And medical school is definitely qualified, so no penalty there. But what if your child decides not to go to med school? You've been saving for years, and now you have a chunk of money in a 529 with no obvious use. Lucas: That's the risk. But again, the 529 is flexible. You can change the beneficiary to another child, a grandchild, or even yourself if you decide to pursue a degree. Or you can use the funds for other qualified expenses like apprenticeship programs, which were added by the SECURE Act. And if none of those apply, you can take a non-qualified withdrawal, pay the penalty, and still come out ahead if the account grew significantly. Luna: Or you could use the new Roth rollover option, right? If the 529 has been open 15 years, you can roll up to $35,000 into a Roth IRA for the beneficiary. That's a great safety net. Lucas: Absolutely. It makes overfunding a 529 much less risky than it used to be. So for parents of a future doctor, I'd say: start a 529 as early as possible, contribute regularly, and take advantage of the state tax deduction. Then, when med school comes, you'll have a powerful tool to keep debt manageable. Luna: And if you're a med student listening, or a resident, you can still open a 529 for yourself. The beneficiary doesn't have to be a child. You can name yourself and use the plan to pay for your own tuition or loans. Lucas: Right. Self-beneficiary accounts are underused. If you're a medical resident with some savings, you could put money into a 529, get a state tax deduction if available, and then use it to pay down your loans. It's a clever way to get a tax break on loan repayment. Luna: I want to circle back to something you mentioned earlier about the cost of attendance. Schools publish a cost of attendance figure that includes tuition, fees, room and board, and personal expenses. Can you use 529 funds for any of those, or only the ones the school specifically lists? Lucas: The rule is that expenses must be 'necessary' for enrollment. Typically, room and board is covered up to the school's official allowance. For off-campus housing, you can use up to the school's published cost of attendance for room and board. But you need to keep receipts and records, because if the IRS audits, you'll need to show the expenses were actually incurred. Luna: So it's not a free-for-all. You can't just withdraw money and use it for a vacation, obviously. But for a med student living in a high-cost city like Boston or San Francisco, the room and board allowance can be substantial. Lucas: Exactly. And that's often where the biggest savings come from. Tuition is tuition, but living expenses can be a huge burden. A 529 plan that covers four years of rent could save a student tens of thousands in loans. Luna: One last question: what about qualifying for the American Opportunity Tax Credit or the Lifetime Learning Credit? If you use 529 funds for tuition, can you also claim those credits? Lucas: No, you can't double-dip. If you use 529 funds for qualified tuition, that same expense can't be used to claim an education tax credit. But you can coordinate: use 529 funds for room and board, and pay tuition out of pocket to claim the credit. That's a common strategy. Luna: Makes sense. So parents with aspiring doctors have a lot of tools at their disposal. The key is to start early, be aware of the rules, and take advantage of the flexibility built into modern 529 plans. Lucas: Absolutely. And if you're already in medical school or residency, it's not too late. Even small contributions now can reduce the debt load later. The most important step is to start the conversation. Luna: That's a great note to end on. Thanks, Lucas. Lucas: Thanks, Luna. And to our listeners, good luck with your savings goals.