Can I use a 529 plan to study abroad?

If your child is heading abroad for higher education, you might be looking for ways to cover the cost. One way to foot the bill is to use a 529 plan. These tax-advantaged investment accounts allow you to stash away money for qualified education expenses, including tuition at eligible international schools.

Can a 529 plan be used for study abroad?

Distributions from a 529 plan can be used to pay for qualified higher education expenses at eligible international schools or universities. But to avoid taxes and penalties, it’s important to be sure that the school and the withdrawals meet IRS rules.

You will need to make sure any costs qualify for use, and you must check if the international school is eligible for Title IV federal student aid. If either isn’t true, you may end up paying a penalty and taxes on any funds used.

What college expenses are covered by a 529 plan for international schools?

A 529 plan allows you to save money for “qualified” education expenses. Generally, those include the normal costs of attending an educational institution, such as:

• Tuition and fees.
• Books, textbooks, supplies and equipment.
• Room and board, if enrolled at least half-time.

But a 529 plan won’t cover certain expenses, including:

• International health insurance.
• Travel expenses.
• Basic living expenses.
• Sports and activity fees.

If you use 529 funds to pay for these nonqualified expenses, the IRS will apply income tax to the withdrawals, as well as a 10 percent penalty on the earnings portion of the withdrawal.

Should I use my 529 to study abroad?

A 529 plan can be a great way to cover the cost of school overseas. To figure out if this is a good fit for your family, first make sure that your child wants to attend an eligible school and that you plan to use the funds for qualified purposes.

Next, you can compare program costs. If your child enrolls in a study abroad program for one or two semesters, they’ll pay tuition and fees to their home university. But if they’re earning a degree through the host school, the school determines the cost of attendance. It might make sense to reserve 529 funds for expenses at the child’s home school if the international school offers a much lower cost.

If the study abroad program is offered through a third-party service, keep detailed records of the expenses you pay. That way, you’ll be prepared if the IRS audits your tax return and tries to challenge whether the expenses are eligible for tax-free withdrawals.

Reasons why you might not want to use your 529 for international schools

While using a 529 plan can help fit the bill for study abroad, you may decide it is better not to. Funds from a 529 plan may be subject to taxes in other countries because the money is only recognized as tax-exempt under U.S. tax code.

Additionally, if you are applying for a study abroad program through a U.S.-based school, you will pay the tuition of that school rather than the school you are attending. If the school where the study abroad program is being taught is less expensive to attend, it may make more sense to pay for the program another way.

Other ways to pay for study abroad

While a 529 plan can be a great way to cover your study abroad expenses, it may not be enough, or the school you’re attending may not be eligible. Other ways to get the funds you need to pay for your experience include:

• Apply for scholarships: The U.S. Department of State provides a list of scholarships available for students studying abroad in different countries, typically provided by foreign governments. Scholarship search engines can help you find financial aid from private organizations.
• Manage your expenses: Unless your study abroad plans are already set in stone, consider going to a country with a lower cost of living. Compare program costs between universities and try to find the right fit for your budget.
• Get a job: Depending on which country you’re planning to study in, you may have opportunities to work while you complete your coursework. Research visa requirements beforehand to understand what your options will be. You can also take a break between semesters and work at home before you travel.
• Apply for student loans: Some foreign universities are eligible for federal financial aid, including federal student loans. There are also private lenders that offer student loans specifically for studying abroad. Federal loans are typically more beneficial in the long run, so focus on those first, then consider private student loans as a last resort.

Take your time to map out your plans for studying abroad and how you’ll cover the expenses. The sooner you start with this process, the easier it will be to enjoy your study abroad experience without worrying about finances.

Bottom line

529 plans are one financial tool that you can use to pay for study abroad programs and can be a useful way to cover the expenses of education overseas. Consider all costs, including taxes, when factoring your decision and determine if using a 529 plan to pay for your education makes sense for you.

If a 529 plan isn’t the best option, and you don’t have enough savings or free aid to cover your program, keep an eye on current student loan interest rates. Exhaust all federal options before turning to private ones.

Frequently asked questions

• Which international universities are eligible for a 529 plan?

  The funds from a 529 plan can only be used to cover the costs of international schools that are eligible for Title IV federal student aid.

• What happens if you use your 529 for nonqualified expenses?

  When you use 529 funds to cover the costs of nonqualified expenses, the IRS applies income tax to the withdrawals. There is a 10 percent penalty on the earnings portion of the withdrawal.

• How can you verify if an international university qualifies for a 529 plan?

  Check the Department of Education’s list of participating schools to see if the university you’re considering qualifies. You can also try contacting the school’s administrative office to ask whether students can apply for federal financial aid in the U.S.