Thanks for the clarification. Why would the powers to be make things easy and have the same IRS and 529 rules?!
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Also, other than a service fee that comes with paying tuition monthly, is there any benefit to paying at the beginning of the semester vs monthly (if it is coming out of a 529).?
What’s the perceived benefit in making monthly tuition payments using a 529, instead of making a lump sum payment at the beginning of the semester?
Money stays in account a bit longer? Also, I had another kid kicked out of private school many years ago after I had made a first semester payment, so ever since then I have been paranoid?
If the financial benefit of having the 529 money sit in the account a bit longer is greater than the cost of the monthly payment plan plus the hassle of making multiple 529 withdrawals and payments to the school over the course of the semester, than sure, do the monthly payment plan. I have no advice for dealing with the paranoia of having a kid kicked out of school.
Also, if you have it sent to you, you can pay by credit card and get the points and then pay off the credit card bill with the 529 dollars! One of my law school friends got a spring break trip out of paying by credit card every year!
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Interesting. My understanding was that 529s could not be used for loans (ie you cant use a 529 to pay a federal student loan – is that correct?) Would that apply to credit cards?
Hmmm. I wouldn’t think so. But I goes I don’t know if it works with 529s because I have not tried it yet. I will have to ask my tax guy when I finally do my taxes for last year!
I used a credit card (with rewards) to pay DD and now rising 4th year DS’s tuition (and room & board) fees for a span of over 7 years now. Just have to watch the due dates vs the year of withdrawal. DD’s school had a due date Jan 1st. With AOTC a little advanced planning was required.
Many schools either will not accept credit cards for payment or they add on a surcharge that will negate any credit card rewards benefit.
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No, not correct. Money is fungible. You can use any form of payment to cover qualified expenses and then reimburse yourself with 529 funds, as long as the payment of the qualified expense and the reimbursing 529 distribution take place in the same year. In fact, 529 funds can now be used to pay off student loans. From IRS Pub 970:
Qualified Higher Education Expenses
These are expenses related to enrollment or attendance at an eligible postsecondary school…
No more than $10,000 paid as principal or interest on qualified student loans of the designated beneficiary or the designated beneficiary’s sibling. A sibling includes a brother, sister, stepbrother, or stepsister. For purposes of the $10,000 limitation, amounts treated as a qualified higher education expense for the loans of a sibling are taken into account for the sibling and not for the designated beneficiary. You can’t deduct as interest on a student loan (see chapter 4) any amount paid from a distribution of earnings from a QTP after 2018 to the extent the earnings are treated as tax free because they were used to pay student loan interest.
2020 Publication 970 (irs.gov) (pages 59 and 60)
Slight tangent but does a student loan have to be used for QEE to be a “qualified student loan”? Otherwise it would seem that you could get tax free money out of a 529 by taking out a $10,000 loan, putting the money in the bank and then repaying it from the 529.
I agree. Another reason I love my credit union, and the standard 3% rewards with my credit card. (Goes to 6% at selected retailers for the holiday season!)
Wow - 3% and up to 6%. That’s probably the best credit card rewards that I’ve seen.
Yeah, I’ve been really stoked about it. County takes CC for property taxes, and I end up ahead, even with their convenience fee!
And no annual fee, either.
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From Internal Revenue Code Section 221(d)(1):
The term “qualified education loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses—
(A)
which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,
(B)
which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and
(C)
which are attributable to education furnished during a period during which the recipient was an eligible student.
Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term “qualified education loan” shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72(p)(4)) or under any contract referred to in section 72(p)(5).
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My kids’ schools did not break out the student fees, just charged a lump sum, so there was no way to know if they weren’t qualified. I know some of the things this paid for wouldn’t be qualified if broken out (the transportation system around campus, the health center) but there wasn’t any way to tell what amount of the fee was for what.
On the 1098, the schools included the entire fee in the qualified expenses.
The actual health insurance was a separate line item.
Agreed. Our school charges 2.99% for using a credit card which negates any benefit. I am surprised that any school would be willing to cover the credit card service charges themselves and lose those tuition dollars.
That’s great! Do you mind sharing which credit union this is?
One comment about up to $10K of 529 money being used for student loans - Not all states recognize that. If the state gave you state tax break, they may treat such a 529 withdraw as unqualified and attempt to get that tax break back. I live in NY and I believe that is the case here.