529 plans: evolution and qualified expenses

When creating an education savings plan, a 529 plan is a smart way to start saving money for your child’s education, no matter how old they are. In looking at the history of 529 college savings plans, it’s clear that the changes made have given more flexibility to account owners while increasing the range of qualified education expenses.

History of 529 plans

1980s

o   Individual states set up prepaid tuition plans, starting with Michigan in 1986.

To address the growing concerns of rising education costs, some states started allowing families to lock in current tuition rates to be used in the future.

1990s

o   State of Michigan v. United States (1994)

Michigan’s prepaid tuition plan, the Michigan Educational Trust (MET), was granted tax- exempt status.

o   Small Business Job Protection Act of 1996

Added Section 529 to the Internal Revenue Code. After-tax contributions and tax deferral on earnings used on qualified expenses were allowed.

o   Taxpayer Relief Act of 1997

Added room and board costs as a qualified expense.

2000s

o   Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001

Added tax-free treatment for qualified distributions until the end of 2010.

o   Pension Protection Act of 2006

All EGTRRA changes to Section 529 were made permanent.

o   College Cost Reduction and Access Act of 2007

529 accounts were reported as a parent asset on the Free Application for Federal Student Aid (FAFSA). Other changes included affected federal interest rates, grants and loan forgiveness.

2010s

o   Achieve a Better Life Experience (ABLE) Act of 2014

529A accounts were added to help families save for a disabled beneficiary’s special needs.

o   Tax Cuts and Job Act of 2017

Expanded 529 plan coverage to include K–12 tuition costs up to $10,000 per year per child. Rollovers from 529 to 529A accounts allowed.

o   Setting Every Community Up for Retirement Act of 2019

Expanded use of 529 plans to cover student loan repayments and to pay for expenses related to apprenticeship programs.

Qualified expenses for 529 Plans

When considering the usefulness of a 529 plan, many are introduced to “qualified expenses.” Knowing what qualifies as an expense for a 529 plan can help families better understand the total cost of an education.

o   Tuition and fees for post-secondary schools. These institutions must be able to participate in the federal student aid program (college, community colleges, graduate schools and even some international schools).

o   Vocational and trade school tuition. Fees and expenses related to apprenticeship programs, provided that the program is registered with the Department of Labor.

o   Elementary or secondary school tuition. The money may come from multiple 529 accounts, but only $10,000 total can be spent each year per beneficiary on elementary, middle, or high school tuition.

o   Room and board. On- and off-campus room and board are qualified expenses for students who are enrolled at least half time. Off-campus housing and rental fees are covered, up to the cost of room and board on campus.

o   Food and meal plans. Meal plans for on- and off-campus students are allowed.

o   Books and supplies. Any supplies required for classes are allowed, which include textbooks, pens, paper and more.

o   Electronic devices. Any electronics (laptops, calculators, etc.) that are required by the college are covered.

o   Computer software. If specific software is required for classes, it can be paid for with 529 funds.

o   Internet services. 529 funds can be used to pay for internet access or ISP fees.

o   Special needs equipment. Any services or equipment needed to accommodate special needs may be covered. This may include things like transportation and wheelchairs.

o   Business startup purchases. If a student wants to start a business after graduation, some business equipment can be expensed if it was also used in the final years of college.

o    Student loans. A lifetime limit of $10,000 can be used to repay the 529 beneficiary’s student loans, including federal and most private loans. An additional $10,000 can be used to repay student loans held by each of the beneficiary’s siblings.

529 non-qualified expenses

While the list is short, some expenses are not covered by 529 plans. However, families should take these expenses into account when considering the total cost of an education.

o   College application and testing fees. These costs precede the beneficiary’s attendance at an eligible institution and therefore do not qualify.

o   Transportation costs. Transportation to and from the qualified institution is not considered a qualified expense.

o    Extracurricular activities. Joining a sport, fraternity or sorority comes with additional costs that are not covered by the 529 plan. Fraternity or sorority housing can be covered (up to the college’s room and board allowance amount), but semester dues are considered a non-qualified expense.

Information is key when it comes to setting up a successful education savings plan. To plan for tomorrow’s dreams today, use our College Savings Calculator and read our ABCs of Education to help you learn about your education savings options.