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Cost of Attendance vs. Qualified Expenses

Not everything can be paid for with 529 funds.

Susan T. Bart, 10/22/2010

Question: Do all expenses listed in a school's Cost of Attendance qualify as Qualified Higher Education Expenses that can be paid out of a 529 account without incurring income tax or a penalty?

Susan: No. Qualified higher education expenses are "(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." Code § 529(e)(3)(A). Certain room and board expenses also qualify (see question 3 below). For 2010, certain computer and internet expenses also qualify (see question 2 below).

My niece's top college choice right now is Yale, so let's look at Yale's Cost of Attendance for 2009-2010:

Tuition and fees: $36,500
Room and board: $11,000
Books and personal expenses: $3,050

In order to be a qualified higher education expense the expense must be required for enrollment or attendance, and the expense must be for tuition, fees, books, supplies and equipment, or expenses for special needs services. The tuition and fees in the Cost of Attendance are presumably required for attendance and therefore are qualified higher education expenses. Books, supplies and equipment qualify only if they are required for attendance. Thus the actual cost of any books or supplies required for the classes in which the student is enrolled will qualify. Books that are not required, even though they may be highly advisable, such as a good dictionary and thesaurus, do not qualify. (My niece might wonder why anyone would want a paper dictionary instead of using an on-line dictionary.) Supplies not required by the school, for example backpacks, pens, notebooks, and computer paper, do not qualify.

Personal expenses do not qualify, even if included in the Cost of Attendance. Transportation costs also do not qualify, even if included in the Cost of Attendance.

2. Has the special exclusion for computer expenses been extended beyond 2010?

 The American Recovery and Reinvestment Act of 2009 temporarily expanded the definition of qualified higher education expenses to include computer technology and equipment, and Internet access and related services, if such technology equipment or services is 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. Explicitly excluded are equipment of a kind used primarily for amusement or entertainment of the user and expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. This special rule applies only to expenses paid or incurred during 2009 or 2010.

Susan T. Bart is a partner in the Private Clients, Trusts & Estates Group at Sidley Austin LLP in its Chicago office, where her practice includes estate planning, estate and trust administration, and fiduciary counsel. She has written two books, including Education Planning and Gifts to Minors published by Illinois Institute for Continuing Legal Education (iicle.com), which extensively discusses 529 plans.

She is the author of Education Planning and Gifts to Minors 2004 Edition. She is a frequent speaker on trust and estate topics in general and Section 529 college savings plans in particular.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.
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