If your family has a 529 college savings plan, you already took a smart step. But knowing how to actually use those funds -- when to withdraw, what counts as a qualified expense, and how to avoid tax penalties -- can feel confusing. And if your family does not have a 529? That is okay too. Plenty of families pay for college without one, and this article will cover your options either way. Here is what you need to know about spending 529 money the right way for the 2025-26 school year.
What a 529 Plan Actually Is
A 529 plan is a tax-advantaged savings account designed for education costs. The money you put in grows tax-free, and withdrawals are also tax-free -- as long as you spend them on qualified expenses. Every state offers at least one 529 plan, and you do not have to use your own state's plan. According to the Education Data Initiative, over 16 million families hold 529 accounts, with an average balance of about $30,295.
But here is the reality: more than half of American parents do not even know 529 plans exist, according to Sallie Mae's How America Pays for College 2025 report. If you are learning about this for the first time, you are not behind. You are right where many families are.
What 529 Funds Can Pay For
The IRS defines qualified education expenses pretty broadly for college. Here is what counts:
- Tuition and mandatory fees at any eligible college, university, or vocational school. This is the most straightforward use.
- Books, supplies, and required equipment. If a class requires a textbook or lab materials, those qualify.
- Computers, software, and internet access. A laptop for school counts, as do printers and required software. The key word is "required" -- a gaming PC would not qualify.
- Room and board -- but with conditions (see below).
- K-12 tuition up to $10,000 per year per child at public, private, or religious elementary and secondary schools.
- Student loan repayment up to a $10,000 lifetime limit per borrower.
The Room and Board Rules
Room and board is one of the biggest college costs, and 529 funds can help. But there are two important rules.
First, the student must be enrolled at least half-time. If your child drops below half-time enrollment, room and board expenses no longer qualify. That means a student taking a lighter course load during summer or a transition semester could trigger a problem.
Second, off-campus rent is capped. If your student lives on campus, the amount the school charges for housing and a meal plan is the qualified amount. If your student lives off campus, you can only use 529 funds up to the cost of attendance (COA) room and board allowance listed by the school -- even if their actual rent is higher. You will need to check your school's COA figure each year.
For many families, especially in high-cost cities, the COA allowance may not cover actual rent. That gap comes out of pocket. Plan for it.
What 529 Funds Cannot Pay For
Some expenses feel like they should count, but they do not:
- Transportation -- gas, plane tickets home, or a campus parking pass
- Health insurance -- even if the school requires it
- Extracurricular fees -- club dues, sports equipment, Greek life costs
- Cell phone bills -- even if you use your phone for school
Using 529 money for any of these triggers taxes and penalties on the earnings portion of the withdrawal.
How to Time Your Withdrawals
Timing matters more than most families realize. You need to match your 529 withdrawal to the same calendar year that you pay the expense. If you pay a spring semester tuition bill in January 2026, the withdrawal needs to happen in 2026 too.
Coordinate with the bursar's office. Most schools will send a bill 4-6 weeks before the semester starts. You can set up your 529 withdrawal to go directly to the school, or have it sent to you and then pay the bill. Either way, keep records. Save receipts, bursar statements, and withdrawal confirmations. The IRS does not require you to submit them, but you need them if you are ever audited.
How to request a withdrawal. Log into your 529 plan's website or call the plan administrator. You will choose how much to withdraw and where the money goes. Some plans let you send the payment directly to the school, which simplifies record-keeping. Others send a check to the account owner, who then pays the school. Both methods are fine as long as the timing matches.
A common mistake: withdrawing 529 funds in December for a tuition bill that is not due until January. That puts the withdrawal in a different tax year than the expense, which can cause problems. Another mistake is withdrawing more than your total qualified expenses for the year. If your tuition, room, board, books, and other qualified costs total $25,000, do not withdraw $28,000. The extra $3,000 would be a non-qualified withdrawal subject to taxes and penalties.
The Tax Trap: Non-Qualified Withdrawals
If you use 529 money for something that does not qualify, the earnings portion of that withdrawal gets hit with federal income tax plus a 10% penalty. Your original contributions are not taxed (you already paid taxes on that money), but the growth is.
Some states add their own penalty on top. California, for example, charges an extra 2.5% state penalty. And if your state gave you a tax deduction for contributing, you may have to pay that back too.
Exceptions to the penalty include:
- The student receives a tax-free scholarship (you can withdraw up to the scholarship amount penalty-free, though you still owe income tax on earnings)
- The student attends a U.S. military academy
- The student dies or becomes disabled
The New 529-to-Roth IRA Rollover
Starting in 2024, the SECURE 2.0 Act created a new option: you can roll unused 529 funds into a Roth IRA for the beneficiary. This is a big deal for families worried about having leftover money in the account.
Here are the rules:
- The 529 account must be open for at least 15 years. This is not a quick fix.
- Only contributions made more than 5 years ago qualify. Recent contributions cannot be rolled over.
- The annual rollover is capped at the Roth IRA contribution limit -- $7,000 for 2025, $7,500 for 2026.
- The lifetime rollover cap is $35,000 total.
- The beneficiary of the 529 must be the same person as the Roth IRA owner.
- Income limits for Roth IRA contributions do not apply to these rollovers.
This is a useful safety net, but it is not a loophole. You cannot open a 529 today and roll it into a Roth next year. The 15-year and 5-year rules make this a long-term planning tool.
How a 529 Affects Financial Aid
This is where families get nervous. The good news: a parent-owned 529 gets favorable treatment on the FAFSA.
- A 529 owned by a parent (or the dependent student) is reported as a parent asset on the FAFSA.
- Parent assets are assessed at a maximum rate of 5.64% per year in the Student Aid Index (SAI) formula.
- That means a $30,000 balance would increase your SAI by roughly $1,692 at most. It affects aid, but modestly.
Qualified withdrawals do not count as income on the FAFSA. This matters a lot. The money you pull out to pay tuition does not get reported as income, so it does not inflate your SAI the following year.
Grandparent-owned 529s got simpler. Under the FAFSA Simplification Act (effective 2024-25), distributions from grandparent-owned 529 plans no longer count as student income. Before this change, a grandparent 529 withdrawal could reduce aid by up to 50% of the distribution amount. That penalty is gone.
If Your Family Does Not Have a 529
Let's be honest: many families do not have a 529. According to Sallie Mae, only about 35% of families use a college savings account of any kind. If you are part of the other 65%, that does not mean you are out of options. It just means your college funding plan will look different.
Here is what to focus on instead:
- File the FAFSA. This is the single most important step. It opens the door to federal grants, work-study, and subsidized loans -- all of which cost you nothing to apply for.
- Apply for scholarships. The average scholarship award is about $8,004 according to Sallie Mae. Families who apply for at least one scholarship are more likely to get one than those who assume they will not qualify.
- Understand your aid package. Compare offers from multiple schools using each school's net price, not the sticker price. CollegeLens can help you break down and compare financial aid offers side by side.
- Look into state aid programs. Many states have grants for residents that do not require a 529.
- Consider starting a 529 now. Even if your child is already in high school, a 529 can still help. Any earnings grow tax-free, and some states give a tax deduction on contributions right away.
Not having a 529 is not a failure. Most families piece together college funding from multiple sources -- savings, grants, scholarships, income, and sometimes loans. The key is understanding all of your options.
Challenges to Watch
- Double-dipping. You cannot use 529 funds for an expense that is already covered by a tax-free scholarship or grant. If tuition is $20,000 and your student has a $15,000 scholarship, only $5,000 of tuition qualifies for a 529 withdrawal.
- Forgetting state recapture. If your state gave you a tax deduction for 529 contributions and you make a non-qualified withdrawal, you may owe that deduction back.
- Not adjusting for scholarship changes. If a scholarship amount changes between semesters, your qualified expense amount changes too. Recalculate before you withdraw.
- Overlooking the half-time rule. Room and board only qualifies if the student is enrolled at least half-time. A student who drops a class mid-semester could fall below this threshold.
The Bottom Line
A 529 plan is one of the best tools for paying college costs tax-free. But the rules matter. Stick to qualified expenses, time your withdrawals to match the calendar year of the expense, and keep records. If you have leftover funds, the new Roth IRA rollover gives you a long-term option. And if you do not have a 529, focus on the FAFSA, scholarships, and comparing your aid offers carefully.
Every family's situation is different. Whether you have been saving for 18 years or are starting from scratch, the goal is the same: pay as little out of pocket as possible and avoid costly mistakes. Understanding the rules now saves you real money later.
Frequently Asked Questions
Can I use 529 funds to pay for study abroad? Yes, as long as the foreign school is an eligible institution under federal student aid rules. Tuition, required fees, and room and board (up to the COA allowance) all qualify.
What happens if my child gets a full scholarship? You can withdraw up to the scholarship amount from the 529 without paying the 10% penalty. You will still owe income tax on the earnings portion, but the penalty is waived.
Can I change the beneficiary on a 529? Yes. You can change the beneficiary to another family member (sibling, cousin, parent, etc.) without tax consequences. This is a useful option if one child does not need the funds.
Want to see how your 529 savings fit into your full college funding plan? Use CollegeLens to compare financial aid packages, estimate your net costs, and build a plan that works for your family.
-- Sravani at CollegeLens