Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Your Childs Study Abroad Program
Transcript
- Lucas: So the email we got this week — a listener named Debra writes in, her daughter is a sophomore at the University of Michigan, and she's been accepted into a semester-long program in Barcelona. Debra's question is straightforward: can she use the family 529 plan to pay for it? And the answer is yes, but with enough nuance that I think we should spend the whole episode on it. Luna: I love this question because study abroad is one of those expenses that feels like it should be covered, but then you start reading the IRS guidelines and your eyes cross. Debra isn't alone. Lucas: Exactly. And look, before we get into the weeds — if today's episode helps you think about a money decision differently, honestly, if it was worth a coffee to you, that's the link at buy me a coffee dot com slash fexingo. Listener support is what keeps this show ad-free and independent. Now back to Barcelona. Luna: Yeah, it's a small way to say this kind of specific guidance matters. So what's the baseline rule? Lucas: The baseline is that a 529 plan covers qualified higher education expenses at an eligible institution. For study abroad, the key is that the program must be approved for credit by the student's home university. If the University of Michigan gives her daughter credit for those Barcelona courses, then the 529 can be used. Luna: And what counts as a qualified expense when you're overseas? I assume it's not just tuition. Lucas: Right, the IRS is pretty generous here. Qualified expenses include tuition, fees, room and board — but room and board has a catch. It's only qualified if the student is enrolled at least half-time. For study abroad, the cost of a dorm or apartment through the program is covered, up to the college's official cost of attendance for room and board. Luna: So if the program charges $1,200 a month for a shared apartment, and U of M's listed room and board is $1,500 a month, you're good. Lucas: Exactly. But what a lot of families miss is that travel costs — airfare, train tickets to get there — are NOT qualified expenses under current IRS rules. The IRS says transportation is only covered if it's a direct requirement for enrollment, which travel generally isn't. Same with health insurance, surprisingly. Luna: Wait, health insurance isn't covered? Even if the program requires it? Lucas: Not as a standalone item. However, if the program bundles health insurance into a mandatory fee, that fee can be treated as a qualified expense. But if you buy a separate policy, it's out of pocket. Luna: So the rule of thumb is: if the expense appears on the program's invoice as a required charge, you're probably safe. If you buy it separately, you're not. Lucas: That's exactly right. And I want to give listeners a concrete example. I spoke with a family in Atlanta — their son did a semester in Barcelona through a CIEE program. Total cost of the program was about $18,500. That covered tuition, housing, a meal plan, and mandatory insurance. They paid it all from their 529. If they had withdrawn that money early without a qualified expense, the 10 percent penalty plus income tax on the earnings would have cost them roughly $3,700 more. Luna: That's a real savings. And it's worth noting that CIEE and similar third-party providers — like API, or direct enrollment through a foreign university — are treated differently if the student is earning credit from the home school. Lucas: Right. The home school's financial aid office is your friend here. Most universities have a study abroad office that can provide a letter confirming that the program is approved for credit. You need that documentation in case the IRS asks. I'd also recommend keeping the program's invoice, proof of payment, and your student's transcript showing the credit. Luna: And what about currency exchange? If the 529 is in dollars and the program charges in euros — does that create any tax issues? Lucas: No tax issues, but you need to track the exchange rate on the day of payment. The IRS expects you to report the dollar amount. If you pay with a credit card that has no foreign transaction fee, that's ideal. Otherwise, the exchange rate on your bank statement is fine. Luna: One more nuance: there are two main types of study abroad — direct enrollment at a foreign university, and a program run by a third party or your home school. Does the 529 treat them differently? Lucas: Yes, but only in terms of how the school qualifies. For direct enrollment, the foreign university must be eligible to receive federal student aid funds. Most accredited universities in developed countries qualify. For third-party programs, the home school's financial aid office usually certifies the program, and the home school itself is the eligible institution. Luna: So Debra's daughter at U of M — if she goes through U of M's study abroad office, which handles the payment to the Barcelona university, then the money flows through U of M. That seems cleaner. Lucas: Much cleaner. In that case, U of M bills you as usual, and you pay with the 529. If the student pays directly to a foreign school, you need to verify that the foreign school has a federal school code. You can find that on the Department of Education's website. Luna: And what if the student goes for a full year instead of a semester? Same rules apply? Lucas: Same rules, but watch the half-time enrollment requirement. If the student is enrolled in less than half the full-time equivalent, room and board is not qualified. So a summer program that's only two weeks? Not covered for room and board. Luna: Good to flag. Also, I want to touch on a strategy some families use: if their 529 is overfunded, they might be tempted to use it for a vacation-style trip that includes a class. That's not going to fly with the IRS. Lucas: No. The IRS looks at the primary purpose. If the student is enrolled in a legitimate academic program and earning credit, it's fine. But a 'study abroad' that's really a two-week tour with a pass/fail elective? That's risky. I'd stick to semester or full-year programs that are clearly academic. Luna: And the paperwork — what's the single most important document to keep? Lucas: The certification from the home school that the program is approved for credit. That, plus the 1099-Q from your 529 plan and the program's invoice. If you ever get audited, those three documents tell the story. Luna: Alright, so if Debra is listening — and I'm sure many parents are — the takeaway is: yes, you can use your 529 for study abroad, but get the school's sign-off, keep your receipts, and don't try to fudge the travel costs. Lucas: Exactly. And if you're planning a study abroad for fall 2026 or spring 2027, start the conversation with the study abroad office now. Some programs have early payment deadlines, and you want to make sure the 529 distribution timing works. Debra, if you're out there, thanks for the question. And listeners, if you have a specific use case you want us to cover, drop us a line. Luna: Next episode, we're tackling something a lot of parents ask about: using 529 funds for a child's off-campus housing when they're not studying abroad. See you then.