Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Graduate School Costs
Transcript
- Lucas: So we've spent a lot of episodes on the undergraduate side of 529 plans, but today I want to talk about graduate school. Because the reality is, more and more students are heading back for a master's or a professional degree, and the cost can be just as eye-watering as undergrad. Luna: And a lot of parents might not realize that a 529 plan can be used for grad school. I know I didn't when I first started looking into it. Lucas: Right. So the short answer is yes, 529 plans can cover a wide range of graduate school expenses, from tuition and fees to room and board, and even some of the more overlooked costs like books and equipment. Luna: And that's under the same umbrella as undergrad, right? As long as the school is eligible. Lucas: Exactly. The school has to be Title IV eligible, meaning it participates in federal student aid programs. So that covers most accredited universities, both public and private, and also many professional schools like law, medicine, and business. Luna: So what about the graduate school entrance exams? Like the GRE or the GMAT? Are those covered? Lucas: That's a great question. Under the SECURE Act of 2019, which expanded 529 plan qualified expenses to include things like apprenticeships and student loan repayments, test prep courses and exam fees are not explicitly listed. So technically, the GRE or GMAT registration fees are not qualified expenses. But test prep materials, like books and practice exams, could be considered as part of the cost of attendance if they're required by the program. Luna: Hmm, so it's a bit of a gray area. But what about the actual application fees? We covered those for undergrad in a previous episode, but does that carry over to grad school? Lucas: It does. Application fees are not qualified expenses under 529 rules, whether it's undergrad or grad school. So those are out of pocket. But once you're in, the big-ticket items are covered. Luna: And room and board is covered, but is there a limit? For undergrad, there's the cost of attendance, but for grad students, is it different? Lucas: For room and board, the rule is that it must be for a student who is enrolled at least half-time. And the amount can't exceed the school's published cost of attendance for room and board. So if a grad student lives off-campus, the allowance is based on the school's estimate, not necessarily the actual rent you're paying. That's an important distinction. Luna: So you can't just withdraw the entire cost of a fancy New York apartment and call it qualified. Lucas: Exactly. You're limited to the school's official room and board allowance. So if your rent is higher, that's on you. Lucas: Another thing that's often overlooked is that 529 plans can cover the cost of a computer or other technology equipment, even for grad school, as long as it's used primarily for educational purposes. We touched on that for undergrad, but it applies equally here. Luna: And what about health insurance? I remember we mentioned that for undergrad, but is it the same for grad students? Lucas: Yes, student health insurance premiums are qualified expenses, but only if the student is enrolled at least half-time. That's consistent across the board. Luna: So if you're a grad student taking a full course load, you can use 529 funds to pay for the school's health insurance plan. Lucas: Absolutely. And that's a significant cost, so it's good to know that's covered. Luna: Now, what about the impact on financial aid for grad students? Because I assume 529 plans can affect it, just like undergrad. Lucas: It's a bit different. For federal aid, the 529 plan assets are often considered as the parent's asset, even if the student is the beneficiary. But for grad school, the student is typically considered independent for FAFSA purposes, so the parent's assets aren't counted. The student's own 529 plan would be counted as their asset, which could reduce aid eligibility by up to 20 percent of the value. Luna: So if you have a 529 plan in the student's name, it could hurt their aid package more than if it was in the parent's name. Lucas: Right. But keep in mind that grad students often rely more on loans and assistantships, so the impact may be less pronounced than undergrad. Still, it's worth planning. Lucas: Another angle is the gift tax exclusion. Contributions to a 529 plan are considered gifts to the beneficiary, but they're eligible for the annual exclusion. And there's a special rule that allows you to front-load up to five years' worth of contributions in a single year without incurring gift tax, effectively up to $90,000 for an individual in 2026, or $180,000 for a married couple. That's a powerful estate planning tool. Luna: So you could put a big chunk into a 529 plan for a grandchild heading to grad school and not worry about the gift tax. Lucas: Exactly, as long as you file the appropriate gift tax return and don't make additional gifts to that same beneficiary in the following four years. Luna: Now, what if the student ends up not going to grad school after all? Can you change the beneficiary without penalty? Lucas: Yes, you can change the beneficiary to a family member of the current beneficiary without penalty, and that includes siblings, cousins, even the parent themselves if they decide to go back to school. The key is that the new beneficiary must be a member of the family, as defined by the IRS. Luna: So you're not locked in. That's reassuring. Lucas: Right. And with the SECURE Act, you can even use 529 funds to repay up to $10,000 in student loans per beneficiary, and another $10,000 for each sibling. That's a nice safety net if you don't need all the funds for school. Luna: That's a great feature, but I imagine the main goal is still to use it for actual education expenses, because that's where the tax benefits really shine. Lucas: Absolutely. The earnings grow tax-free, and withdrawals for qualified expenses are also tax-free. That's a generous benefit, especially for high-income families who might not qualify for other education tax credits. Luna: Speaking of tax benefits, are there any state tax deductions for 529 contributions? And do they apply if you're saving for grad school? Lucas: Many states offer a deduction or credit for contributions to their own 529 plan. And yes, it applies regardless of whether the beneficiary is an undergrad or grad student. Just remember to check your state's rules, because some states require you to use their plan to get the deduction. Luna: Got it. So if you're a resident of a state with a generous deduction, that's worth factoring into your decision. Lucas: Definitely. And it's also worth noting that you can choose any state's 529 plan, not just your own. So you can shop around for the best investment options and fees, even if you miss out on a state tax break. Luna: Now, with the cost of grad school being so high, is there a maximum contribution limit to a 529 plan? I've heard of people hitting a cap. Lucas: There is a limit, but it varies by state. Most states set it well above the cost of even the most expensive graduate programs. For example, some states have limits over $500,000. So in practice, it's rarely a constraint for typical savers. Luna: That's a relief. I was worried there might be a tight cap that could limit your ability to save for a high-cost program like medical school. Lucas: Right. And you can also have multiple 529 plans for the same beneficiary, so you could even split contributions across plans if you wanted to, though that adds complexity. Luna: Before we wrap up, let's talk about the practical side. If you're a parent saving for your child's graduate school, when should you start? And how much should you target? Lucas: The earlier the better, as with any long-term investment. But for grad school, you might start later because the beneficiary might be in their early twenties when they begin their program. You could start when your child is in high school or even during their undergrad years. The key is to estimate the total cost of the program you're targeting, factor in inflation, and then work backwards to determine a monthly contribution. Luna: That sounds like a solid strategy. And it's never too late to start, even if your child is already in undergrad, because you have some runway before grad school begins. Lucas: Exactly. And you can also fund a 529 plan for yourself if you're planning to go back to school. That's something many adults don't consider, but it can be a smart way to save for a career change or an advanced degree later in life. Luna: That's a great point. I know a lot of people in their thirties and forties are thinking about going back for an MBA or a certificate, and using a 529 for that is a win-win. Lucas: And speaking of wins, if you're finding these conversations helpful, a couple of dollars a month is genuinely what keeps them going. You can buy me a coffee dot com slash fexingo, and it makes a real difference for our little independent podcast. Luna: Yeah, it's a small way to keep the lights on and the episodes coming. We really appreciate it. Lucas: So, to circle back, 529 plans are incredibly flexible for graduate school. Whether it's a two-year master's or a six-year MD, the tax advantages can save you thousands. But as with any financial product, the key is to understand the rules and plan ahead. Luna: And the rules are surprisingly generous, as long as you stick to qualified expenses. So if you're contemplating grad school, don't overlook the 529 as a funding tool. Lucas: Next time, we might explore how to coordinate 529 savings with other education accounts, like Coverdell or custodial accounts. Until then, happy saving.