Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How Qualified Expenses in 529 Plans Have Expanded
Transcript
- Lucas: The single biggest question I get about 529 plans is, 'What can I actually use this money for without getting hit with a penalty?' And until a couple years ago, the answer was pretty narrow: tuition, fees, room and board, books, and a computer. That was basically it. Luna: Right, and if you pulled money for anything else, the earnings portion got hit with income tax plus a ten percent penalty. That kept people really strict about what counted. Lucas: Exactly. But the SECURE Act of 2019, and then the SECURE 2.0 Act in 2022, fundamentally changed that. The big headline is that starting in 2024, you can use 529 funds to pay down student loans — up to a ten thousand dollar lifetime limit per beneficiary. Luna: Ten thousand dollars total, not per year. That's an important cap. And it applies to both the beneficiary's loans and, in some cases, siblings' loans. So if you have a 529 for one kid and another kid has student debt, you can't just redirect that money — it has to be the same beneficiary. Lucas: Right. The loan repayment benefit is tied to the beneficiary of the account. So if you named your daughter as beneficiary, the ten thousand can go toward her loans, or even toward a sibling's loans if the distribution is made to the sibling — but the IRS has been a little murky on that last part. Most advisors say keep it simple: use it for the named beneficiary's loans. Luna: And the other big expansion is apprenticeship costs. If someone is enrolled in a registered apprenticeship program with the Department of Labor, the costs — tools, equipment, testing fees — all now count as qualified expenses. No dollar cap on that side. Lucas: That's huge. Because for years, a lot of families with kids going into trades felt like 529 plans just weren't relevant. You'd hear, 'My son's becoming an electrician, why would I use a college savings plan?' But now apprenticeship costs are explicitly included. Tools for a welding program, for example, or fees for a plumbing apprenticeship — those are all fair game. Luna: And it's retroactive, isn't it? The rule applies to distributions made after 2018, so if you already took money out for an apprenticeship thinking it wasn't qualified, you might be able to amend your tax return. Lucas: That's a good catch. The IRS notice 2024-14 clarified that distributions for apprenticeship costs are qualified retroactively to 2019. So anyone who paid those expenses out of a 529 and paid a penalty can file an amended return and get that ten percent back. Luna: Let's talk about the student loan piece a bit more. Ten thousand dollars — that's meaningful, but it's also not huge. The average student loan debt for a bachelor's degree is around thirty-seven thousand. So this covers about a quarter of that for one beneficiary. But if you have multiple siblings, you could potentially move the 529 to different beneficiaries over time and use the cap for each. Lucas: You can. And there's no time limit on when you can do it. So if you have an older child who graduates with debt, you can change the beneficiary on the 529 to that child, take out up to ten thousand for their loans, then change it to the next child, and so on. The lifetime limit is per beneficiary, not per account. So you can recycle the account across multiple kids. Luna: But there's a catch that a lot of people miss: the loan repayment distribution is treated as a qualified expense only if the loan is in the beneficiary's name. So if you as a parent took out Parent PLUS loans, you can't use your child's 529 to pay those off — unless you change the beneficiary to yourself, which is allowed if the plan permits it. Lucas: Right. And changing the beneficiary to a parent is allowed under most state plans, but you have to check. Not all plans allow beneficiary changes to any family member — some restrict it to siblings or first cousins. So you need to read your specific plan's rules. Luna: And then there's the state tax deduction angle. Many states offer a deduction on contributions to your in-state 529 plan. But if you take a distribution for student loan repayment, some states may recapture that deduction because they don't recognize the loan repayment as a qualified expense for state purposes. Lucas: That's a tricky one. The federal government says it's qualified, but state conformity varies. As of May 2026, most states have conformed to the federal expansion, but a handful — I think it's still about ten — have not. So if you live in California or New Jersey, for example, the loan repayment distribution might be subject to state tax even if it's federal-tax-free. Luna: And for the apprenticeship piece, most states do follow the federal definition. But again, you have to check. The safest move is to call your plan's customer service or look up the state's latest conformity status. Lucas: Let's shift to the K-12 expansion, which actually came first. The Tax Cuts and Jobs Act of 2017 allowed 529 funds to cover up to ten thousand dollars per year in tuition at private elementary or secondary schools. That was a huge change because before that, 529 money was strictly for post-secondary education. Luna: Right, and that ten thousand is per year, not lifetime. So if you have a child in private K-12 for eight years, that's eighty thousand dollars that can come out of a 529 tax-free. But again, state conformity is an issue — some states don't recognize K-12 expenses as qualified and will recapture your deduction. Lucas: And it's only tuition. Not room and board, not books, not computers for K-12. That's a distinction a lot of people miss. So if you're paying for private school, you can pull out ten grand a year for tuition, but if you also need to pay for a laptop for that student, that still has to come from after-tax money. Luna: So the overall picture is that 529 plans have become a lot more flexible. But with flexibility comes complexity. The old rule was simple: use it for college or pay a penalty. Now you have to track what's qualified for federal purposes, what's qualified for state purposes, and what the lifetime limits are. Lucas: And there's still one big open question: what happens if you overfund a 529 and have leftover money? The Secure 2.0 Act did address this a bit by allowing rollovers to Roth IRAs — up to thirty-five thousand dollars total, starting in 2024. But that's a separate topic we've covered before. The key is: the penalty for non-qualified withdrawals is still there, but the definition of 'qualified' has expanded significantly. Luna: I want to get practical for a moment. If a listener is sitting on a 529 plan right now and their child is done with college, maybe with some loans, what's the single best thing they can do with that money? Lucas: First, check if the beneficiary has any remaining qualified expenses. If they have student loans, you can use up to ten thousand to pay those down. If they're starting a registered apprenticeship, you can cover tools and fees. If none of that applies, consider changing the beneficiary to a younger sibling or even a grandchild. Or, if the account has been open for at least fifteen years, you can roll up to thirty-five thousand into a Roth IRA for the beneficiary. That's a powerful option. Luna: And if none of those work, you can always just take a non-qualified withdrawal, pay the income tax on the earnings plus the ten percent penalty, and walk away. But that should be a last resort. Lucas: Absolutely. The penalty is still ten percent on earnings, plus ordinary income tax. So if you have significant gains, that could eat up thirty, forty percent of the money. It's better to find a way to use it for education. Luna: You know, Lucas, this kind of detailed planning is exactly why we do this show. We want to help people make informed decisions without worrying about hidden fees or penalties. Lucas: And that's also why we deliberately keep these episodes free of ads. No sponsors, no commercial breaks. If you find value in that approach and want to support it, there's a simple way to do it. You can head over to buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. It helps us keep the show independent and focused on what matters — your financial questions. Luna: Yeah, every bit of support goes right back into research and production. It's a small way to help us keep doing this. Anyway, back to 529s — one last angle I think is worth mentioning: the impact on financial aid. Lucas: Right. If a 529 is owned by a parent, it's reported as a parent asset on the FAFSA, which means it's assessed at a maximum rate of 5.64 percent. That's relatively favorable. But if the account is owned by a grandparent, it's not reported on the FAFSA at all until distributions are taken. Those distributions are then counted as untaxed income to the student, which can reduce aid eligibility by as much as fifty percent of the distribution amount. Luna: So the expansion of qualified expenses to include student loans actually creates a new strategy for grandparent-owned 529s. You can leave the money in the account until after the student graduates, then use it to pay down loans. That way, it never shows up on the FAFSA during college. Lucas: Exactly. With the loan repayment option, grandparents can avoid the financial aid trap entirely. Just keep the 529 in their name, let the student go through college with loans, and then after the last FAFSA is filed, change the beneficiary to the student and use the funds to pay up to ten thousand of those loans. It's a clean workaround. Luna: And that's a strategy that didn't exist three years ago. It's a perfect example of how the rules are evolving. So if you're planning ahead, it's worth revisiting your 529 assumptions every year or two. Lucas: Good advice. The landscape has changed, and it's likely to keep changing. As of May 2026, the student loan repayment provision is still fairly new, and there's talk in Congress about raising the ten thousand dollar cap. But for now, it's a useful tool — just one with limits. Luna: And don't forget the apprenticeship piece. If you have a kid who's more hands-on, a 529 can now be a real asset for that path too. Lucas: Absolutely. I think the broader takeaway is that 529 plans are no longer just for four-year college. They're for any form of education that leads to a credential or a job. And that's a shift worth paying attention to.