What happens to a 529 plan if your child does not attend college

For years, you’ve been working hard and diligently planning to save for your child’s future. You even did the right thing and opened a 529 Savings Plan so the money would be there when it was time. Now the big moment has come for your child to decide on a college –– there’s just one thing. This child suddenly has other plans. Now what?  

The truth of the matter is that there are any number of reasons why some children do or do not go on to college after graduating from high school. So in a way, opening a 529 Savings Plan for your child is a bet. You are betting that he or she will go to college. The reality is that we never truly know what the future holds, and this can be a heavy realization.  

Now you have a whole new set of questions and concerns. You’re fully aware that withdrawals from 529 plans can only be used for expenses that are education-related, otherwise you’ll be responsible for federal and state income taxes as well as a 10% penalty on the earnings. 

Good news: 529 funds can be used for educational expenses that are not strictly limited to college 

Recently, and for many 529 plans, federal law has widened the scope of possibilities where the use of 529 funds are concerned, to include K-12 expenses (up to $10,000 per year and keeping in mind that some states have different restrictions), professional schools, qualifying 2-year programs, trade schools and vocational schools; whether at home or abroad. 

529 assets can be used to pay off existing student loans 

Yes, really –– more good news. The SECURE Act of 2019 allows for up to $10,000 (note that this is the lifetime maximum) of 529 plan assets to be used toward paying off student loan debt. According to the May 2021 U.S. Census report, 12.9% of Americans have student loan debt. This allowance can help alleviate some of that pressure. 

The beneficiary can be changed 

You control your 529 plan, so no matter who the savings were initially intended for, you have the power to change your beneficiary. You can make another child the beneficiary or –– and this may be great news for a parent who wants to go back to school or go for a masters degree –– you can even make yourself the beneficiary. If the original beneficiary decides later that college was a good idea after all, and wants to attend, the name can be changed back if that is what you decide. With most 529 plans, the name of the beneficiary may be changed once a year. 

You can cash out your 529, but it’s costly 

Of course, you can use the money for things outside of the costs of education, but as was mentioned earlier, not without being penalized. This deserves careful consideration, especially since the whole point of a 529 is to grow your money without the federal tax burden. It may be best to sit on your plan before making your decision. Your child may even come around to find that college was really the best option.

If you have any questions (and we expect that you will), please contact an Invesco 529 specialist today. We’re here to help.