Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Study Abroad Semester Costs
Transcript
- Lucas: So Luna, if a student heads to Madrid for a semester, can the family use 529 money for the flight over? Luna: I think that's a yes, but I'm not sure about the details. Is airfare actually a qualified expense? Lucas: It can be, but it depends on the program. The IRS treats study abroad as qualified if it's run by an accredited college and the student is enrolled in a degree program. So tuition, room and board, and even airfare can count, but only if the program is approved. Luna: That's helpful. And it reminds me that we should mention something else before we get deeper into this. We keep these episodes ad-free, and that's a choice we make because we think the information should be accessible. If you find value in what we do, you can support us at buy me a coffee dot com slash fexingo. It keeps the lights on without any commercial interruptions. Lucas: Exactly. No ads, no sponsors, just the facts. And we really appreciate the listeners who make that possible. Luna: Now, back to Madrid. What about the language school that isn't affiliated with the home university? Does that still count? Lucas: It gets murky. If the student enrolls directly in a foreign university that's accredited in its own country, that usually counts. But if it's a standalone language institute with no degree-granting status, the IRS might not consider it qualified. You'd be on the hook for taxes and a ten percent penalty on the earnings portion. Luna: I actually had a friend who did that. She used 529 money for a summer program in Florence that wasn't through her college, and she ended up with a tax bill she wasn't expecting. Lucas: That's a common trap. The key is to check if the program is approved by the home institution. Most universities have study abroad offices that can certify the program as eligible for financial aid, and that's a strong signal for the IRS. Luna: So what's the right way to document all this? I imagine receipts are important. Lucas: Documentation is huge. You want to keep the program's approval letter, the enrollment confirmation, and itemized receipts for tuition, housing, and flights. If you ever get audited, you'll need to show that the expenses were indeed qualified. Luna: And what about things like a new suitcase or travel insurance? Those probably don't count, right? Lucas: Right, those are not qualified. The IRS is pretty strict: it's tuition, fees, room and board, books, and equipment required for the course. So a new backpack might qualify if it's for coursework, but travel insurance is a no-go. Luna: That makes sense. Let's talk numbers. A semester abroad can cost anywhere from ten to twenty thousand dollars depending on the destination. How does that compare to a typical semester at home? Lucas: In many cases, it's comparable, especially if the student pays the home institution's tuition and then pays for housing abroad separately. Some programs actually include airfare in the fee, which can simplify things. But the key is to check if the total cost is within the student's cost of attendance, because that's what the IRS uses as a guideline. Luna: So if the study abroad program is more expensive than home, you can still use 529 funds up to the cost of attendance? Lucas: Exactly. The limit is the student's cost of attendance as defined by the college, which includes tuition, room and board, and other expenses. If the study abroad program is within that, you're fine. If it's over, you might have to pay tax on the excess. Luna: I've also heard that some 529 plans have their own rules about foreign institutions. Is that true? Lucas: Yes, but most follow the federal guidelines. A few states have explicit lists of eligible foreign schools, but generally, if the institution is accredited in its own country and the program is approved by the home institution, it should be fine. It's always worth checking with your plan administrator. Luna: And what about currency exchange? Does that affect the tax treatment? Lucas: Not directly. You just need to keep track of the amounts in U.S. dollars. The exchange rate at the time of the expense is what matters. So if you pay rent in euros, you convert it to dollars on the date of payment and keep that record. Luna: So it's all about documentation. Now, what if a student decides to extend their stay by a few weeks? Does that mess up the qualified status? Lucas: It depends. If they're still enrolled in the program, the extra weeks are likely covered. But if they're just travelling, those costs aren't qualified. So you have to be careful to separate the educational expenses from the leisure ones. Luna: That's a good reminder. Before we wrap up, is there any recent change or proposal that could affect study abroad and 529 plans? Lucas: Nothing major as of August 2026. The rules have been stable for a while. But it's always a good idea to check with a tax advisor, especially if you're planning a big withdrawal. Luna: So the takeaway is: if you're considering study abroad, make sure it's through an accredited program, keep all your receipts, and you should be able to use 529 funds without penalties. Lucas: Absolutely. And remember, the earlier you start planning, the better. With a 529, you can even pay for a study abroad advisor to help you navigate the logistics, as long as that service is considered a qualified expense. Luna: That's a good tip. I didn't know that. So even the fee for a study abroad consultant could be covered? Lucas: It can, if it's a required fee for the program. But again, you need to check with your plan and keep documentation. It's another reason to work with your college's study abroad office. Luna: All right, Lucas. Any final thought for our listeners who are thinking about this? Lucas: Just that study abroad can be a fantastic experience, and with a little planning, your 529 can help make it happen without the tax headaches. Do your homework, talk to your plan provider, and enjoy the adventure. Luna: And if you have questions, you know where to find us. Until next time.