College savings plans with tax benefits, called 529 plans, aren’t just for the traditional, four-year college experience at a U.S. university.
“I think one of the myths around these plans is that they are designed for a four-year school or a degree-seeking school, and that’s not necessarily the case,” says Betty Lochner, past chairwoman of the College Savings Plans Network and director of Washington’s Guaranteed Education Tuition savings plan. “The plans, by design, are very flexible, so people can use them pretty much anywhere for pretty much any purpose.”
One concern that families express about 529 plans is that their child won’t elect to go to college or that they won’t be able to use all the savings toward school. Although 529 plans allow savings to grow on a tax-deferred basis, the earnings are subject to taxes and a 10 percent penalty if not used at an eligible institution or for qualified education expenses.
But the list of “eligible institutions” is broad, Lochner says, spanning elite private colleges, state flagship universities, local community colleges, theological seminaries, trade schools offering culinary or beauty skills training, and international schools.
An eligible institution is defined as a college, university, vocational school or postsecondary institution eligible to participate in federal student aid programs administered by the U.S. Department of Education. Examples of nontraditional schools that are eligible include the Golf Academy of America; the Le Cordon Bleu College of Culinary Arts; the commercial diving program CDA Technical Institute in Jacksonville, Florida; and the Chicago Theological Seminary.
Experts emphasize the importance of saving for college; 73 percent of parents with children younger than 18 worry about funding college, topping any other financial concern, according to a Gallup poll conducted last year.
“Any sort of education beyond high school will have a very positive outcome on students’ earning power over their lifetime,” says Kris Spazafumo, lead for college savings business with American Funds, the largest 529 plan manager in the country. “I think that certainly is acknowledged by the 529 legislation in that there is pretty broad acceptance of the educational institutions that are eligible.”
Here are four surprising places to use college savings plans.
1. Trade schools and community colleges: From learning to be a massage therapist to mastering culinary skills to exploring film directing, many schools that teach specialized trades are eligible for 529 funds. Some examples include the Refrigeration School in Phoenix, the Paul Mitchell schools of beauty, the Utah College of Massage Therapy and the New York Automotive and Diesel Institute.
The sticker price on these schools can be significant. For instance, the net average price at Le Cordon Bleu in Pasadena, California, is $15,967, according to the Department of Education, while the Paul Mitchell schools can range between around $10,000 and $18,000, depending on the location.
The list of eligible institutions also includes accredited community and technical colleges. They offer a way for students to get a start on college, and also often offer technical or career-oriented fields of study and continuing education.
“It’s not just universities and four year-schools, but also community colleges qualify, which is a great way for students to start out their upper education,” Spazafumo says.
[Find out how trade schools and community colleges can prepare students for careers.]
2. Graduate schools: Withdrawals from 529 plans can also be used for many graduate school programs, so if a student doesn’t deplete the funds during his or her undergraduate years, the money can be applied to grad school as well. This includes medical school, law school and business school as well as research-oriented degrees.
Because the beneficiary can be changed within a family without any tax liability, parents can even use 529 funds for themselves.
“It’s not unusual for parents, midcareer, to change what their interest is,” Spazafumo says. “Perhaps they want to go back to school or get a master’s degree.”
[Learn how to put college savings toward grad school.]
3. International schools: There are more than 400 schools abroad that are also eligible for 529 funds, including the Glasgow School of Art, the Australian National University and Franklin College in Switzerland, to name a few.
Study abroad programs run through a U.S.-eligible school are another way to use 529 funds abroad, says Lochner.
“If (students) really want to go somewhere, a lot of times they can look up a school, and find out who they partner with in the U.S.,” she says.
4. Online colleges: Many online college and university programs, such as those offered by the University of Phoenix, are also eligible. This also goes for online courses offered by an established institution.
If there are any doubts about the eligibility, review the Department of Education list, Lochner says.
Check out a searchable database or view an Excel spreadsheet of the schools available from the department.
Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.
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4 Surprising Places to Use 529 Plan College Savings originally appeared on usnews.com
