Factoring a gap year into college savings

Can 529 funds be used for gap-year expenses?

Factoring a gap year into college savings

I recently had a parent ask me if their child’s 529 college savings account money could be used to help pay for gap-year expenses. Here’s the short answer: Maybe.
If you’re hoping to use your child’s 529 account to pay for travel, extracurricular activities, insurance or medical expenses, the answer is no. If you’re hoping to pay for tuition and fees, books and other qualified educational expenses, then the answer is maybe. Let’s take a closer look at this relatively new option for high school graduates and how a 529 account might play a role.

What is a gap year?

First, a little background. A gap year is just what it sounds like: High school graduates wait a year before starting college. Thanks to some well-known students taking gap years (both Prince William and Prince Harry took gap years, as did Malia Obama, who deferred her Harvard enrollment), this previously unheard-of practice is now commonplace.

The American Gap Association1 estimates that 30,000 to 40,000 US students caught the gap bug last year. Why? Reasons vary, but they can include taking a year off either to recover from academic fatigue or to “try out” a possible career path through an internship or other opportunity. Some students seek to boost their résumé with travel or volunteer experiences to increase their chances of getting into a competitive university. Whatever the reason, a gap year typically adds an extra year of expenses, which leads to many parents wondering if a 529 account can help fund gap-year activities.

Gap expenses and 529s: two important concepts to understand

The two concepts to keep in mind regarding 529 account distributions are qualified, as in qualified education expenses, and eligible, as in eligible educational institutions. Let’s look more closely at both of these.

1. Qualified education expenses. Are the expenses being incurred by your child qualified educational expenses as defined by IRS Publication 970? 1 The list is short and includes such items as:

  • Tuition and fees
  • Books, supplies and equipment
  • Expenses for “special needs” services directly related to enrollment/attendance
  • Room and board incurred by students who are attending at least half-time
  • Computers, peripherals, software, internet access and related services during enrollment/attendance

Note that there are nuances around these items — some expenses have to be “required” by the sponsoring institution. Don’t assume anything — always check the details noted in the IRS documentation.

2. Eligible educational institution: The IRS states that qualified expenses must be related to enrollment or attendance at an eligible educational institution, which IRS Publication 9701 defines as:

… Any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education. It includes virtually all accredited public, nonprofit and proprietary (privately owned profit-making) postsecondary institutions.

The IRS has conveniently compiled this list,1 but don’t assume it’s static — it can change frequently.

There are also programs like Outward Bound1 that are being offered through a partnership with an eligible educational institution, which may create an opportunity to use 529 funds for qualified expenses for some nontraditional activities. Just be sure to check with the university affiliated with that or similar programs to ensure the eligibility status is current before your child enrolls.

Before you start: Consult the experts

There are some caveats to be aware of if you and your child decide a gap year is the right move, so before you make decisions, it’s a good idea to:

1. Talk to your student’s high school academic counselors — they have experience and insights parents don’t — and talk to the academic counselor at the college your child ultimately plans to attend to ensure the gap-year program you select is aligned with the school’s policies.

2. Check with your financial advisor on two fronts:

  • To be sure your particular 529 plan doesn’t have more restrictive rules pertaining to gap-year expenses
  • To determine whether you need to adjust your contribution schedule so that the account is sufficient to support a gap year plus four years of school

Of course, whether gap-year expenses are reimbursable by a 529 account is only one consideration in the decision to defer college enrollment. Above all, parents are trying to give their kids a great start on adult life — and sometimes, that start begins with a gap.

1 This link takes you to a site not affiliated with Invesco. This site is for informational purposes only. Invesco does not guarantee or take any responsibility for the content.

Read more about retirement and education strategies by Tom Rowley.

Important information

Blog header image: Media Bakery/BLD0188998

Invesco Distributors, Inc. is not affiliated with American Gap Association or Outward Bound.

Thomas Rowley

Director, Retirement and Education Strategies

Thomas Rowley is director of retirement and education strategies and one of Invesco’s most frequently requested speakers. He provides analysis of the evolving retirement landscape and develops actionable strategies to help investors and financial advisors maximize their retirement-planning opportunities. Mr. Rowley regularly shares his insights online at invesco.com/us in addition to his speaking engagements.

Mr. Rowley’s insights reflect more than 20 years of experience in the investment industry. He translates his comprehensive knowledge of retirement planning into lively, clear explanations of the complexities of legislative, investing, tax and social issues.

Mr. Rowley shares his analyses of retirement-related issues through regular personal appearances, continuing education webinars and Web-based commentaries.

Mr. Rowley has been director of retirement business strategy since 2010. Prior to joining Invesco in 2010, he was in charge of individual retirement plan products and Retirement Marketing at Van Kampen.

Prior to joining Van Kampen in 1996, he was a 401(k) regional sales director with an investment firm. His experience also includes seven years in retirement plan operations and three years as head of a brokerage firm’s retirement help desk. He began his career in the Treasury bond futures pit at the Chicago Board of Trade.

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