Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Your Childs Graduate School Tuition
Transcript
- Lucas: So you've been diligently saving in a 529 since your kid was born, and now they're wrapping up undergrad. But they want to go to grad school — an MBA, a master's in public health, maybe medical school. Can you keep using that 529 money? The short answer is yes — with some important details. Luna: I think a lot of parents assume the 529 is done after four years of college. But the IRS actually defines 'qualified higher education expenses' to include graduate and professional degree programs. Lucas: Exactly. The tax code says eligible institutions are those eligible to participate in federal student aid programs. That covers pretty much any accredited graduate school — universities, professional schools, even some vocational programs at the graduate level. Luna: So what counts as a qualified expense for grad school? Is it the same as undergrad? Lucas: It's very similar. Tuition and fees, of course. Books, supplies, and equipment required for enrollment. And room and board — but only if the student is enrolled at least half-time, and the cost can't exceed the school's official cost of attendance budget. Luna: Right, that same half-time rule applies. So if your kid is doing a part-time executive MBA while working, they might not meet that threshold. Lucas: That's a really good point. A lot of grad students go part-time. If they're not at least half-time, room and board isn't a qualified expense. Tuition and books still are, but housing comes out of pocket. Luna: One thing I've seen trip people up: the $10,000 per year limit on K-12 tuition from a 529. That doesn't apply to grad school, right? Lucas: No cap on higher education, including grad school. You could use $50,000 a year out of a 529 for an MBA program and it's all tax-free as long as it's a qualified expense. That's a huge difference from the K-12 rule. Luna: And the expenses have to be at the graduate school's listed cost of attendance. You can't just pull out extra cash for a new laptop if the school's budget already includes one. Lucas: Right. The school sets the cost of attendance. You can use 529 funds up to that amount. If your child's medical school tuition is $40,000 and the budget allows $25,000 for living expenses, you can use up to $65,000 per year from the 529. Luna: Let's talk about a common scenario: parents have one 529 account for their child. The child goes to undergrad and there's $30,000 left over. Now they're starting a PhD program that's fully funded — tuition waived, stipend included. Lucas: That's a great scenario because it's not rare. If the PhD program covers tuition, you can't use the 529 for tuition because there's no charge. But you can use it for other qualified expenses — books, required equipment, and even some living expenses if they're in the cost of attendance. Luna: But what about the stipend? If the student receives a stipend for living expenses, does that reduce how much you can take from the 529? Lucas: It doesn't directly reduce the qualified expenses. The 529 withdrawal just needs to be for actual costs. So if the student has $20,000 in living expenses and a $15,000 stipend, they still have $5,000 in qualified room and board costs. You could use the 529 for that $5,000. Luna: And if the 529 is in the parent's name, it still counts as a parent asset on the FAFSA. But for grad school, the FAFSA treats the student as independent, so parent assets don't count anyway. Lucas: That's a critical change. For graduate school, the student is considered independent for federal financial aid purposes. So the 529 in the parent's name won't reduce eligibility for federal loans or work-study. That's different from undergrad. Luna: But what if grandparents own the 529? That's a different story. Lucas: Grandparent-owned 529s have a unique advantage for grad school. Since the student is independent, distributions from a grandparent-owned 529 won't show up as student income on the FAFSA. That income would normally reduce aid, but for grad students, it's not counted. Luna: So it's actually a great strategy for grandparents to help with grad school through a 529. No aid penalty at all. Lucas: Exactly. And if the student has their own 529 account — maybe they opened one as an adult — that's even simpler. It's just their asset. Luna: Let's switch to a different angle. What if the 529 has too much money? The student finishes grad school and there's still $20,000 left. Lucas: That's the overfunding risk. You have a few options. Change the beneficiary to another family member — a sibling, a cousin, even the parent if they want to take a class. Or you can take a non-qualified withdrawal and pay income tax on the earnings plus a 10 percent penalty. Luna: But with grad school costs being so high — especially for professional degrees like law or medicine — overfunding is less likely. The average medical school tuition is over $40,000 a year, and that doesn't include living expenses. Lucas: Right. The median law school tuition is about $50,000. An MBA at a top program can be $80,000 a year. If you saved $100,000 over 18 years, that might cover two years of a master's program. So underfunding is actually a bigger risk for grad school. Luna: I want to ask about state tax deductions. Some states offer a deduction for 529 contributions. Does that apply if the funds are used for grad school? Lucas: Yes, as long as it's a qualified withdrawal. The state deduction you got when you contributed is not recaptured if you use the money for qualified expenses. So you get the deduction upfront, and the withdrawal is tax-free at the federal level and usually at the state level too. Luna: But some states have clawback provisions if you use the money for non-qualified expenses. So if you take that leftover $20,000 and spend it on a vacation, they might recapture the state tax benefit. Lucas: Good point. Each state's plan has its own rules. You should check the specific plan's terms. But for qualified grad school expenses, you're safe. Luna: You know, we talk a lot about specific strategies on this show, and I hope today's episode gave you a clearer picture of how 529s can work beyond undergrad. Lucas: If this kind of detail has been useful to you, that's exactly why we do it. The show stays free and ad-free, and the way we keep it that way is through listener support. If you'd like to help, you can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that makes a big difference for us. And we really appreciate everyone who's chipped in. Lucas: So back to the topic — another nuance: some grad programs, like executive MBAs, have tuition that includes meals and lodging as part of the program fee. That's still a qualified expense if it's required by the program. Luna: Right. So if the school says the program includes a week-long residency with meals and hotel, that's covered. It's built into the tuition. Lucas: One last thing: if your child is pursuing a graduate degree that requires a license or certification, like a teaching credential, that also qualifies if it's part of a degree program at an eligible institution. Luna: So essentially, the 529 is a very flexible tool for graduate education. The key is to keep receipts and know your school's cost of attendance. Lucas: And if you're planning ahead, consider adding a little extra to the 529 for grad school. The savings will grow tax-free, and if your child doesn't go, you can always change the beneficiary. Luna: Great advice. Thanks for listening, and we'll see you next time.