Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / Using 529 Plans for Graduate School Entrance Exam Costs
Transcript
- Lucas: So let me start with a number: the average cost of a GRE prep course plus the exam fee runs about 1,200 to 1,500 dollars. For the MCAT, it can push 2,000. And most families don't realize they can pay for that from a 529 plan. Luna: Wait — really? I thought 529 plans were mostly for tuition, room and board. Graduate school entrance exams feel like a gray area. Lucas: They used to be gray, but the IRS has given clearer guidance. If your child is enrolled at least half-time at an eligible institution, any required fees, books, supplies, and equipment — including prep courses and exam fees that are part of the program — can be covered. The key phrase is 'required for enrollment or attendance.' Luna: So if my kid is in their junior year of undergrad and wants to start studying for the LSAT, that counts as long as they're still enrolled at least half-time? Lucas: Exactly. And it doesn't have to be through the college itself. You can use a 529 to pay for a third-party prep course like Kaplan or Princeton Review, as long as the cost is reasonable and the student is enrolled at an eligible institution. But the exam fee itself — say, the 200 dollars for the GRE — is a qualified expense only if the test is required for admission to a graduate program the student is pursuing. Luna: That makes sense. But what about the actual test registration? That's usually done through ETS or the LSAC, not the school. Lucas: Right, and the IRS rule says 'fees, books, supplies, and equipment' — so registration fees paid directly to a testing agency are covered if the test is required for admission. Some 529 plan administrators initially balked at that, but recent guidance from the SECURE 2.0 Act reinforced that qualified expenses include 'any amount paid for any course of instruction at an eligible institution.' And the prep course is a course. Luna: So the prep course is a clear yes. The exam fee is a qualified expense if it's required for admission. What about the cost of sending score reports to multiple schools? Lucas: That's a good question. Score report fees are typically considered part of the application process, not a required expense for enrollment. So those probably aren't covered. Stick to the prep course and the exam registration itself. And remember — you can only withdraw up to the cost of attendance at the school, including these expenses. So don't go overboard. Luna: Alright, let's get specific. My daughter is a junior in college, half-time, and she's planning to take the MCAT next spring. She wants to buy a set of prep books and a practice test bundle. Total cost: about 800 dollars. Can I pay that with 529 funds? Lucas: Yes, as long as those materials are required for her MCAT preparation. In practice, the IRS looks at whether the expense is 'necessary' for a course of instruction. A prep course that includes books and practice tests — absolutely. But if she's just buying a random book from Amazon, keep the receipt and make sure it's directly related to the test. The safer route: pay for a structured prep course that includes materials. Luna: And if she takes a prep course that's offered by her university's continuing education department — even better, right? Lucas: That's the gold standard. When the expense flows through an eligible institution, there's almost zero audit risk. Some schools even allow you to charge the prep course to your tuition bill, and then you pay with 529 funds. That creates a clear paper trail. Luna: But what about students who are already in graduate school? Say someone is in a master's program and needs to take the GMAT for a PhD application. Can they use 529 funds? Lucas: Tricky. If they're already enrolled half-time in a graduate program at an eligible institution, the prep course for another exam could still qualify — but only if the exam is required for their current program. Most PhD applications happen after the master's, so the GMAT might not be 'required for enrollment' in the master's. In that case, the expense might not be covered. Always check with your 529 plan administrator. Luna: So the cleanest scenario is: an undergraduate student who is at least half-time, preparing for an admissions test required for graduate school. That's the sweet spot. Lucas: Exactly. And if these kind of specifics help you navigate the 529 rules, you're exactly the listener we have in mind. Luna: And if you value having this information ad-free, you can support us at buy me a coffee dot com slash fexingo. It's a big help. Lucas: Now, one more nuance. The SECURE 2.0 Act also created the option to roll over up to 35,000 dollars from a 529 to a Roth IRA, but that's separate. For exam prep, you don't need to wait for a rollover — just pay directly from the 529 and avoid the 10 percent penalty. Luna: But what about students who are studying abroad? Say my son is doing a semester in London, and he wants to take the GRE at a test center there. Does that change anything? Lucas: Not really. The location doesn't matter as long as the student is enrolled at an eligible institution and the test is required. The travel costs to get to the test center aren't covered, but the exam fee itself is fair game. Just keep the receipt that shows it's the same GRE registration fee. Luna: Let's talk about some real numbers. If I withdraw 1,500 dollars from a 529 to pay for MCAT prep and the exam, and I'm in a state that offers a tax deduction for 529 contributions, am I essentially getting a double benefit? Lucas: Not exactly. The state tax deduction comes when you contribute, not when you withdraw. So if you contributed that 1,500 dollars earlier and got a state deduction, then the withdrawal for qualified expenses is tax-free federally and state. That's the intended benefit: tax-free growth and tax-free withdrawal. So it's not a double dip, it's just the full benefit of the plan. Luna: Got it. And what if the prep course costs more than the student's cost of attendance? For example, a high-end live online course that costs 2,500 dollars. Lucas: The 529 withdrawal must not exceed the student's total qualified expenses for the year. That includes tuition, fees, room and board, and books. So if the prep course pushes total expenses above the school's official cost of attendance, you could trigger a taxable distribution on the excess. But if the student has other qualified expenses that cover the gap — like tuition — you're fine. Just don't withdraw more than the total. Luna: One more thing: for students who are attending a community college part-time but planning to transfer to a four-year school — can they use 529 funds for the SAT or ACT? Lucas: Yes, because those are entrance exams for undergraduate admission. Same logic applies. As long as the student is enrolled at an eligible institution — which community colleges are — the SAT or ACT prep and exam fees are qualified. Even if they plan to transfer, the test is required for enrollment at the next school. Luna: So the coverage is broader than most people assume. I think the takeaway is: if your child is a current college student, you can use 529 funds for admissions test prep and the exam itself, as long as you keep good documentation. Lucas: Exactly. And one final tip: some 529 plans have a specific list of qualified expenses on their website. If you're unsure, call the plan's customer service and ask: 'Can I use 529 funds to pay for a GRE prep course offered by a third party?' Get the representative's name and the date for your records. That way, if the IRS ever questions it, you have evidence of due diligence. Luna: That's smart. And if you're a listener planning for graduate school, now is the time to start using your 529 for these costs. Most students take the entrance exams in their junior or senior year, so don't wait until after graduation. Lucas: Right. Once the student is no longer enrolled at least half-time, those exam prep expenses are no longer qualified. So the window is during undergrad or when they're in a graduate program. After that, you'd be better off paying out of pocket and using the 529 for other purposes. Luna: Great point. So to recap: 529 plans can cover GRE, GMAT, MCAT, LSAT, and other graduate entrance exam prep and fees, as long as the student is enrolled half-time at an eligible institution and the exams are required for admission. Lucas: That's the core. And like many 529 rules, the devil is in the details. But with a little planning, you can save hundreds or even thousands in after-tax dollars. And that's a win for any family facing the rising cost of graduate school. Luna: Absolutely. Thanks for listening, and we'll be back next week with another college savings topic.