What Qualifies as Section 529 Housing Expenses During COVID-19?

The global COVID-19 pandemic has presented us all with numerous new challenges, none more so than those facing students and parents. In many states, physical classrooms remain closed, leaving students, teachers and parents at the mercy of technology in ways no one could have expected. Even in states that have opened their classrooms, school buildings and campuses, COVID-19 has presented new challenges and a “new normal.” The implications are widespread and, truly, global.

Those implications aren’t strictly limited to concerns about classrooms and distance learning but also flow into the already daunting questions of how to save and budget for education expenses, especially for post-secondary learning. For nearly a quarter century, one of the most popular educational savings tools has been the 529 plan, so called in reference to section 529 of the Internal Revenue Code. Saving for College has a helpful and easy-to-understand timeline of the 529 plan here.

What Is a 529 Plan?

529 plans facilitate planning for higher education by giving high-income families a way to set aside money for expenses without facing tax penalties. Because 529 plans are managed by states, their details vary by location. In general, though, there are two types of 529 plans: prepaid plans, which afford some sort of tuition guarantee to offset future increases, and savings plans, which tend to be investments tied to market performance.

In many states, 529 plan contributions provide some sort of tax deferment. In all states, funds withdrawn from the plan and used for qualified education expenses are tax free. Beyond tuition, those approved expenses include other fees, books, supplies and required additional equipment. For most college students, those expenses also include room and board in on- and off-campus housing during an academic period.

According to Mark Kantrowitz, publisher and VP of Research at savingforcollege.com, there are four basic types of housing that qualify as education expenses under 529 plans:

• Living on campus in college-owned or -controlled housing.
• Living off campus in an apartment.
• Living at home with parents.
• Living on a military base with housing costs covered by the military.

Housing is one area where COVID-19 has caused a new wrinkle. Many parents and students are wondering how housing expenses are handled in distance-learning situations? Is “off-campus” housing still covered? Does that include expenses incurred by students living at home with their parents? Students in their own apartments? Is there a dollar limit to what is covered?

Qualified Educational Housing Expenses Under 529 Plans

529 plan funds can indeed be used to cover housing costs, both on- and off-campus, for students during any academic period, assuming the student is enrolled at least half-time. Allowances for how much and how they are used are set by individual schools, but certain qualifying restrictions are consistent. For example, the student must be enrolled in an eligible Title IX institution, the student must be seeking a degree or certificate (i.e., continuing education classes don’t count) and dual-enrollment students (e.g., in both elementary and secondary) don’t qualify. Typically, off-campus housing is covered up to the same school-imposed limits as on-campus room and board. The amount varies by institution and by year. For the 2017-2018 school year nationwide, the average annual room-and-board cost for public colleges was $10,000; for private colleges, it was $12,000.

For more details, including a housing cost calculator for 529 plans in your state, click here.

Location, Location, Location

Off-campus student housing costs are covered the same under 529 plans, regardless of location concerns like proximity to campus and living with or without parents. While some families understandably prefer to remain in their “bubble” together, for some students, living with their parents may not be ideal. For example, their parents or other family members may be immuno-compromised. Maybe their parents’ house isn’t well-suited to online learning, especially with other members of their family having their own Zoom meetings, online classrooms and telehealth appointments. Perhaps the quiet and personal space an apartment allows is a better learning environment for a college-aged student, even if it’s not on or near campus. Wherever the student lives, 529 plans cover room and board up to the same allowances imposed by the school.

The school in question should have a housing expense calculator either on line or available from the administration. For example, the University of Texas at San Antonio’s online estimating guide can be found here.

Has Distance Learning Affected 529 Plan Coverage?

When Congress devised 529 plans under the Small Business Protection Act of 1996, no one considered what would happen under a global pandemic that has shut down schools, limited travel and kept most people at home, interacting only by virtual means. The spring of 2020 brought an unexpected set of new realities that have affected nearly every aspect of life.

Because COVID-19 has far-reaching ramifications for us all, outside of anything we can control, the IRS temporarily eased restrictions on how 529 funds could be used at the end of the 2020 school year. Further, the Coronavirus Aid, Relief, and Economic Security (CARES) Act suspended federal student loan payments through the end of September. The end of September is fast approaching, however, so what now? A small handful of colleges have offered discounts for this fall semester, but for everyone else, their 529 plan remains a powerful tool for affording a secondary education, including housing costs.

The good news for students continuing their post-secondary education in distance learning situations (and their parents) is that 529 plans still cover housing costs the same way, whether the student lives with their family, in an off-campus apartment or on campus (where available). Some campuses remain closed, while some students simply must continue distance learning for other reasons, at least until things “normalize.” Wherever that learning happens, your 529 plan will still cover your expenses, including housing. Contact the college in question for information regarding how much 529 plan money can be used for off-campus housing.

Our website has more helpful information about funding higher education during these extraordinary times. If you’d like some new insights about the impact COVID-19 can have on higher education, check out this article on our blog.

And if you’d like to know more about planning for education expenses, we are also currently offering an on-demand webinar, How to Survive Paying for College. As always, we’re here to help!