What happens if 529 is not used for college

One of the most common misconceptions about the college savings plan is that it is a college or university savings plan. In addition to primary and secondary schools, you can use a plan at any postsecondary institution eligible to participate in federal student aid programs. Eligible postsecondary institutions include community colleges, trade schools, and certificate programs. There are even several golf academies in California that are eligible for the savings plan.

If your child is thinking about not attending university, discuss other career options that require further training, such as cosmetology, massage therapy, and certificate programs like those for computer repair and IT. Funds in a college savings plan can be transferred to a family member of the beneficiary once per year with no consequences.

The list of family members includes parents, grandparents, aunts, uncles, step-relatives, in-laws, children, spouses of the relatives mentioned above, and first cousins. If the beneficiary lives with an individual for a majority of the tax year, this person may also be eligible to receive funds even if the individual is not a family member. If the beneficiary has a change of heart, you can convert the account back to the original beneficiary.

Many parents began a college savings plan as soon as their child is born, only to discover that their child has a disability and may not attend college. These funds can be used for qualifying expenses and do not affect Medicaid benefits. If that the beneficiary earns a scholarship, you can withdraw up to the amount of the scholarship award penalty free. If the beneficiary dies, the account holder can withdraw the money without penalty. You can also transfer the account to an eligible relative of the beneficiary who can use the funds for qualified education expenses.

If the beneficiary is diagnosed with a disability, you can withdraw money from the account to pay for some expenses related to the disability. You can also convert the account to an ABLE account.

Some parents choose to transfer ownership of the College Savings Plan to the child, especially if it contains contributions from relatives and friends. In this case, the beneficiary can decide to save the funds for a later time or make an early withdrawal.

If account ownership is transferred to the beneficiary, they will be responsible for paying taxes on any withdrawals. When the parent is the account holder, the effect on EFC is drastically reduced.

Though a College Savings plan can be used for a variety of educational opportunities, and even disability expenses, it cannot be used to pay funds in the event of personal hardship unemployment, medical bills, financial hardship without penalty.

A common misconception about college savings plans is that the entire portion of the withdrawal is taxed. Because you make contributions with after-tax dollars, they are not taxed. The earnings portion of the account is taxable income, and the account holder is required to pay state and federal taxes on only the earnings portion of the withdrawal. Unlike other educational savings accounts, the college savings plan does not expire or have a time limit.

You can even save the funds for your grandchild. If you think that your child might decide to go to college, set a date three to five years in the future to discuss what to do with the account.

The account could serve as an emergency fund to withdraw from as necessary down the road. Before making a final choice about what to do with the account, take some time to process your options and talk to your tax professional. A covered educational institution's name or logo on the Edmit platform is not an endorsement by the covered educational institution of SoFi's student loan products.

Edmit may receive compensation from SoFi on a per-funded loan basis. Talk to your tax or financial professional, or the administrator of your plan, for more information.

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