Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Off-Campus Apartment Rental Costs
Transcript
- Lucas: So, your kid gets into college, and instead of the dorm, they want to live off-campus with friends in an apartment. Can your 529 plan cover that rent? The short answer is yes — but with a very specific limit that catches a lot of families off guard. Luna: I've heard people assume it's just tuition and maybe a meal plan. The rental part feels like a gray area. Lucas: Right. And the IRS actually gives clear rules here, but they tie the limit to something called the 'cost of attendance' — that's the official budget figure each school publishes. For the 2025-2026 academic year, the University of Texas at Austin lists off-campus room and board at around $14,000 for students living in an apartment. That's the ceiling. Luna: So if your child's rent plus utilities plus food comes to, say, $1,200 a month, that's $14,400 over twelve months. You'd be over the limit by $400. Lucas: Exactly. And that $400 excess would be a non-qualified distribution — meaning it's subject to income tax on the earnings portion plus a 10% penalty. So it's crucial to know your school's specific cost of attendance number for off-campus housing. Luna: Does the school publish that separately for on-campus versus off-campus? Or is it one lump figure? Lucas: Most schools break it out. At UT Austin, for example, they list on-campus room and board at about $13,000 and off-campus at $14,000. The off-campus figure typically includes rent, utilities, and food — basically enough to cover a modest apartment and groceries. But you can't just withdraw the full amount without documentation. Luna: What kind of documentation are we talking about? A lease? Utility bills? Lucas: Yes, all of that. The IRS doesn't require you to submit anything upfront, but if you're ever audited, you'll need to show that the money actually went to rent, utilities, and food — not to a security deposit that's returned, or to a new couch. The lease, rent receipts, and maybe a spreadsheet showing how you allocated the funds are your best defense. Luna: And what about security deposits? I know some landlords ask for first and last month's rent plus a deposit. Can the 529 cover that upfront lump sum? Lucas: Interesting question. The deposit itself is refundable — you get it back when the lease ends. The IRS generally considers refundable deposits as not a qualified expense because it's essentially an asset that's returned. But first month's rent and last month's rent? Those are rent payments, so they count — as long as they don't push you over the cost of attendance limit for the year. Luna: So timing matters too. If you pay last month's rent in August, that's part of the current academic year's cost of attendance? Or does it get allocated to next year? Lucas: Good point. The general rule is that the distribution should be made in the same year the expense is incurred. Most families take a distribution in the fall for the full year's rent, but if the lease covers two academic years, you'd need to split it. For simplicity, many schools define the academic year on their financial aid website, so you can match your withdrawals to that period. Luna: I think a lot of parents don't realize that the cost of attendance includes food. So if your kid is paying for groceries, that's also a qualified expense from the 529 — up to the limit. Lucas: That's right. The IRS defines room and board broadly. It covers rent, utilities, and food. So if your child is buying groceries, that's a qualified expense. But eating out at restaurants? Technically not — unless it's part of a meal plan through the school. That's a nuance many people miss. Luna: So you're saying if they order DoorDash every night, that's not covered? But if they cook pasta from the grocery store, it is? Lucas: Exactly. The IRS says 'food' in this context is meant to be normal meals, not dining out. Of course, if you're audited, you'd need to show that the amount you allocated for food is reasonable. A good rule of thumb is to use the school's off-campus room and board figure as your absolute cap, and then allocate a portion for rent and a portion for food based on actual expenses. Luna: And what about utilities? If the rent doesn't include electricity and internet, can the 529 cover those? Lucas: Yes, utilities are included in the room and board definition. So electricity, gas, water, even internet — all qualified. But again, stay within the cost of attendance limit. And keep the bills. If you pay the electric bill directly from the 529 account, that's clean. But if you just withdraw cash and then pay, make sure you have the receipt. Luna: What if the student has a roommate and they split rent? Can the 529 still cover the full $1,200 if the student's share is only $600? Lucas: The 529 can only cover the student's actual expenses. So if the rent is $1,200 total and the student pays $600, you can only withdraw $600 for rent from the 529. The cost of attendance limit applies to the student's share, not the total apartment cost. This is a common area of confusion. Luna: So the parent should be careful to only withdraw what the child actually pays. That makes sense — you don't want to be in a position where you're funding a roommate's rent through a 529. Lucas: Right. And if the child is living with a partner or spouse, the same rule applies — only the student's portion is eligible. Now, one more thing: if the student is enrolled at least half-time, the cost of attendance room and board limit is the maximum. But if they drop below half-time during the semester, the room and board expense is no longer qualified for that period. That's a trap. Luna: So if your child takes a semester off but stays in the apartment, you can't use 529 money for rent during that time? Lucas: Correct. The student must be enrolled at least half-time for room and board to be a qualified expense. So if they withdraw from classes, you need to stop 529 distributions for rent and food until they re-enroll. Otherwise, those withdrawals become non-qualified. Luna: Let's talk about the cost of attendance number itself. Where do parents find it? Just on the school's financial aid page? Lucas: Usually yes. Search for 'cost of attendance' on the college's website. It's the same figure used for financial aid eligibility. But note: the off-campus figure may be lower than the on-campus figure at some schools, so don't assume you can just use the on-campus number. You need the specific off-campus budget if that's where your child lives. Luna: And if the school doesn't publish an off-campus figure? What then? Lucas: If the school doesn't provide a separate off-campus number, the IRS says you can use the on-campus room and board figure, or you can use the actual amount charged by the school for housing if you lived on campus. But if your child lives off-campus, it's safest to use the on-campus figure as your cap. Some families use the actual rent plus a reasonable food allowance, but without a school-published figure, you have less audit protection. Luna: So plan ahead. Before your child signs a lease, look up the school's cost of attendance and make sure the rent is within that budget. Lucas: Exactly. And if the rent is above the cost of attendance, you might consider a cheaper apartment — or fund the excess with non-529 money. The 529 is a powerful tool, but it's not unlimited. Luna: You know, Lucas, this kind of practical detail — knowing exactly how the rules apply to a real apartment lease — is exactly why people listen to this show. If today helped you think through your own family's situation, we want to keep these episodes coming, ad-free. The way that happens is through listener support at buy me a coffee dot com slash fexingo. That's a small way to say this content matters to you. Lucas: Yeah, and it genuinely makes a difference. Even a few coffees a month help us keep the research deep and the advice practical. No ads, no sponsors — just the information you need. Luna: So back to off-campus housing — one more scenario. What if your child lives at home with you and commutes? Can you still use a 529 for room and board? Lucas: That's a great question. If the student lives with parents, the room and board expense is generally not qualified because you're not paying rent to a third party. The IRS expects actual expenses paid to the school or a landlord. However, if the school includes a 'living with parents' cost of attendance figure — some schools do — you could use that amount for food and other expenses, but it's tricky. Most families just skip it. Luna: So the key takeaway: off-campus rental costs are covered, but only up to the school's cost of attendance, only if the student is at least half-time, and only for actual rent and utilities paid by the student. Documentation is critical. Lucas: That's the nutshell. And one final pro tip: if you're planning to withdraw from the 529 for off-campus rent, do it in the same calendar year as the lease payments. Don't withdraw a lump sum for a full year in advance if the lease spans two tax years — split the withdrawal to match the expenses. That keeps your records clean and avoids any question about timing. Luna: Good advice. Alright, next episode we'll tackle another common 529 question — can you use it for a student's car payment or insurance? Spoiler: probably not. Lucas: No, definitely not. But we'll explain why. Until then, happy saving.