College Expenses and the Stimulus Package

College-savings expert Susan Bart answers advisors' questions on 529 plans and other education-planning matters. E-mail your questions to advisorquest@morningstar.com.

The American Recovery and Reinvestment Act of 2009 includes two temporary changes that affect the funding of higher education. First, the Act expands the definition of qualified higher education expenses under Code section 529. Second, the Act enhances the Hope Scholarship Credit. In general, these changes are effective only for 2009 and 2010.

Bailout for Computer Manufacturers
Expansion of Qualified Higher Education Expenses. The Act temporarily expands the definition of QHEEs to include computer technology and equipment, and Internet access and related services, if such technology equipment or services are to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution. This expansion applies only to expenses paid or incurred during 2009 or 2010.

This change addresses, for two years, the specific issue of whether a computer for a student qualifies as a QHEE. However, the amendment is unclear in many respects. Further, the amendment may be of limited use to many account owners who have recently seen significant declines in the value of their 529 accounts and are more concerned about whether the accounts are sufficient to pay tuition, and less concerned about new ways to spend the money in the 529 accounts. However, for those few who may have excess funds in 529 accounts, the Amendment provides a new spending opportunity.

Old Provision. Section 529(e)(3) defines the QHEEs that may be paid from a section 529 account without federal income tax on the distribution. Section 529(e)(3) previously provided:

(A) IN GENERAL. - The term "qualified higher education expenses" means -

(i) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; and

(ii) expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance.