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college savings 529
college savings 529
college savings 529

What happens to a 529 if my child gets a college scholarship or grant?

When planning for educational costs, there are many factors that must be taken into consideration. Utilizing a 529 plan can be greatly beneficial toward anticipating the expenses ahead; however, it is difficult to predict what may be received in grants and scholarships in the future. When a student receives additional aid, it poses a question regarding what will happen to funding saved that is now being covered elsewhere. Thankfully, there are a variety of different options that can be pursued in this circumstance.

What happens to my 529 if my child gets a college scholarship?

Withdraw 529 Funds Penalty Free

Normally, withdrawing from a 529 plan comes with potential taxes and penalties. However, if the withdrawal is a result of a scholarship being added, the penalty will not be applied. 529 plans will allow money to be taken out for the exact amount of the scholarship or grant that has been awarded.  

Taxes for 529 account if child gets a scholarship withdrawa;

So, if the potential for a scholarship has been preventing you from saving in your child’s 529, this is generally not a cause for concern.

Save for Future Educational Expenses.

One option available is to leave the funds within the 529 plan for a future use. Often, there are additional expenses that could come up such as graduate school, study abroad programs, or other expenses. This is a great option toward taking full advantage of the scholarship funding received to use 529 savings toward educational expenses or opportunities that you did not originally anticipate or expect to achieve.

Up to $10,000 of a 529 account can also be used towards student loans as well. So if your child, or another beneficiary you’d like to transfer the account to, has student loans outstanding, any leftover 529 assets could also be used to pay down those loans.

It is worth noting that not all states allow earnings from 529 accounts to be used towards student loans without penalty or tax impact. For example, Missouri does not allow 529 assets to be used towards student loans. While you will get a Federal tax break, you will be taxed at the state level for this withdrawal. It is important to double check with your specific state’s 529 plan.

Designate Funds to a Different Beneficiary.

Another option is to designate the funds to another child or future grandchild for educational use. It is simple to reallocate the 529 funds to a different beneficiary for continued use within the family. Otherwise, planning to fund another family member’s educational expenses such as a future grandchild or relative can be extremely beneficial toward educational expenses ahead.

It is important to check with your state’s 529 plan to ensure you are following rules with your plan. For example, in Iowa, a 529 may be passed to the “member of the family” to the original beneficiary. A “member of the family” is defined as:

  • Father, mother or an ancestor of either;
  • Son, daughter or a descendant of either;
  • Stepfather or stepmother;
  • Stepson or stepdaughter;
  • Brother, sister, stepbrother, stepsister, half brother or half sister;
  • Brother or sister of the father or mother of the Beneficiary;
  • Brother-in-law, sister-in-law, son-in-law, daughter-in-law, father-in-law or mother-in-law;
  • Son or daughter of a brother or sister;
  • Spouse of the Beneficiary or spouse of any of the individuals mentioned above; and
  • First cousin.
  • Also of note: A legally adopted child of an individual is treated as the child of such individual by blood, and a half brother or half sister is treated as a brother or sister

There are many options available toward the use of 529 plan savings when scholarships are received. Deciding what solution is the best fit for your situation may take some thought and consideration. Our team can help when making these decisions to ensure that you are taking full advantage of additional aid that you may not have expected. Please feel free to reach out if you have questions regarding the implementation of your 529 plan.

Want to learn more about the details of your state’s 529 plan and advanced college savings topics? We recently did a webinar for clients exploring the finer details of Iowa’s 529 plan and some potential planning topics that many don’t consider. You can watch a recording of our webinar here.

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