Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Your Childs International University Tuition
Transcript
- Lucas: So your child gets into a university abroad — say, McGill in Montreal, or Oxford in the UK. Can you pay the tuition and fees with a 529 plan? The short answer is yes — but only if the school is on a specific list. Luna: I think a lot of parents assume 529 plans only work for U.S. colleges. But the rules have actually been pretty broad for years. Lucas: They have. The key is that the foreign institution must be eligible to participate in the U.S. federal student aid program — the FAFSA system. Basically, if the school has a code for federal aid, it qualifies for 529 withdrawals. Luna: That's a useful filter. How many foreign schools make the cut? Lucas: Roughly 400 to 500 institutions globally, depending on the year. They're mostly in Canada, the UK, Australia, and a handful in Europe and Asia. McGill, University of Toronto, Oxford, Cambridge, University of Sydney — all on the list. Luna: So that covers many top-tier schools. But what about expenses beyond tuition? Can you use 529 funds for room and board at a foreign university? Lucas: You can, but there's a catch. Room and board is a qualified expense only if the student is enrolled at least half-time. And the amount is capped at the school's official cost of attendance for room and board — same as with a U.S. school. The 529 plan doesn't just write a blank check for rent in London or Paris. Luna: Makes sense. And what about travel? A plane ticket to Tokyo can be expensive. Lucas: Travel is not a qualified expense for a full degree program, unfortunately. That's a common misconception. The IRS only allows travel costs for study abroad programs that are part of a U.S. school's curriculum — think a semester in Florence through your state university. For a direct enrollment at a foreign university, airfare and transportation don't qualify. Luna: Good to know. So you can pay tuition, fees, books, supplies, and room and board — up to the school's allowance — but you can't fund the flight over. Lucas: Exactly. And there's another nuance: currency exchange. When you take a distribution from a 529 plan, it's in U.S. dollars. But the foreign school bills in local currency. The IRS says the distribution is qualified as long as it's for eligible expenses, regardless of exchange rate fluctuations. But you need to keep careful records — the exchange rate on the day of payment matters for your tax reporting. Luna: What if the exchange rate moves after you withdraw the money? Say you take out $20,000 and the tuition is only $18,000 after conversion. Lucas: Then you have a non-qualified distribution on the excess $2,000 unless you use it for other qualified expenses within the same tax year. The earnings portion of that excess would be subject to income tax and a 10% penalty. So you want to be precise about the amount. Luna: This is where it gets tricky. But the broader point is that 529 plans really are flexible. You can even change the beneficiary to a sibling if the first child doesn't go abroad. Lucas: Absolutely. You can roll over funds to another family member without penalty. So if you saved for your daughter's tuition at Oxford and she decides to stay stateside, you can switch the beneficiary to her brother without tax consequences. Luna: One thing I want to flag: the list of eligible foreign schools can change. A school might lose its federal aid eligibility, which would make future 529 withdrawals non-qualified. Lucas: That's a real risk. The Department of Education updates the list annually. So if you're planning a withdrawal for a specific foreign school, check the current FAFSA school code list before you pull the money. Don't rely on a list from two years ago. Luna: Let's talk about a concrete example. Say a family has $100,000 in a 529 plan and their child gets into McGill. Tuition for an international undergraduate is roughly $30,000 to $50,000 Canadian per year depending on the program. That's about $22,000 to $37,000 U.S. per year. Lucas: Right. So the 529 can cover four years of tuition and fees, plus room and board — which at McGill might be around $12,000 Canadian for a dorm. That's roughly $9,000 U.S. So total annual cost around $46,000 U.S. if you include everything. The 529 could handle most of that, but you'd still need to cover travel and personal expenses from other savings. Luna: And remember, the 529 plan's earnings grow tax-free as long as withdrawals are for qualified expenses. That's the main advantage — not having to pay capital gains on the growth. Lucas: Exactly. But there's a planning point here: if the foreign school's cost is lower than a comparable U.S. private college, you might actually over-save. Then you'd have leftover funds. You could either change the beneficiary to a sibling, or take a non-qualified withdrawal and pay the penalty. Or you could use the leftover for graduate school — even abroad — as long as the grad school is also on the eligible list. Luna: And if your child gets a scholarship, you can withdraw up to the scholarship amount penalty-free. The earnings are still taxed as income, but no 10% penalty. Lucas: That's a key rule for any 529 plan, but especially relevant for international students because many foreign universities offer generous merit scholarships to attract top U.S. applicants. If your child gets a half-tuition scholarship at Oxford, you can pull out the equivalent amount from the 529 without penalty. Luna: I think the biggest takeaway is: don't assume a 529 can't be used internationally. Do your homework on the school's eligibility, calculate costs carefully, and keep records of exchange rates. It's a viable path. Lucas: And if you're early in the savings process and think your child might study abroad, it's worth considering a plan with low fees and broad investment options — because you might be holding that account for a decade or more before the withdrawal. The flexibility to change beneficiaries also matters. Luna: On a related note — if today's conversation helped you think about your education savings strategy, honestly, that's the kind of thing that makes this show worth doing. If it was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. Lucas: We keep the show ad-free, and listener support makes that possible. No pressure — just a fact. Now, back to the international angle: one more nuance I want to cover is the impact of currency on the 529's investment choices. Luna: Are you thinking about the fact that if you save in a U.S.-domiciled 529, your investments are in U.S. dollars, but the expense will be in a foreign currency? That's a kind of currency risk. Lucas: Exactly. If the U.S. dollar weakens against the Canadian dollar or the British pound over the savings period, your 529 balance might not stretch as far. There's no way to hedge that within a 529 plan, but being aware of it can help you adjust contribution levels. You might want to aim for a higher target amount if the exchange rate is unfavorable. Luna: It's another reason to check the current exchange rate when you're about to make a withdrawal. If the dollar is strong, you get more purchasing power. Lucas: Right. And if you're making withdrawals over multiple years, the exchange rate will fluctuate. So you might have one year where your $30,000 covers everything, and another where it's short. Budgeting for that variance is smart. Luna: What about using a 529 for a foreign medical school or law school? Those are graduate programs, so as long as the school is eligible, it should work. Lucas: It should. The rules are the same for graduate and undergraduate. If the school has a federal school code, the 529 can pay for tuition, fees, books, and room and board. Medical and law programs are expensive, so the 529 cap might actually be less of an issue — you'll use the full amount. Luna: One final thought: the 529 plan's beneficiary can be changed to the original beneficiary's spouse, children, or even first cousins. So if your child meets someone abroad and gets married, you could potentially transfer the plan to their spouse? No, I think that's not allowed. Lucas: Spouses are eligible family members for beneficiary changes, actually. So if your child marries a non-U.S. citizen, you could change the beneficiary to that spouse — as long as they are a U.S. citizen or resident alien? Actually, the 529 beneficiary doesn't need to be a U.S. citizen. The plan rules vary by state, but generally, the beneficiary can be any person, regardless of nationality. The key is that the school must be eligible. Luna: That opens up even more possibilities. But let's keep it simple: the core message is that 529 plans are not just for U.S. colleges. If you have global aspirations for your child's education, the 529 can be a powerful tool. Lucas: Absolutely. To sum it up: check the FAFSA school code list, confirm the expenses are qualified, account for currency risk, and keep good records. Do that, and you can use your 529 savings almost anywhere in the world. Luna: Great advice. Thanks, Lucas. And to our listeners, we'll be back next time with another angle on college savings. Lucas: See you then.