529 Accounts: What Happens When Your Child Doesn’t Go to College?

Dear Carrie,

We’ve been saving in a 529 account for years for our son’s education, but it now looks like he won’t be going to college. Are there other options for using this money?

—A Reader

Dear Reader,

One of the great—and challenging—things about having kids is that they can surprise you at every turn. While you can save diligently for their education, you can’t predict what their talents or interests will be. Trust me—as a mother of three, I know from experience!

I think many of us envision a four-year college for our kids, but that’s only one of a myriad of choices, especially today. So, does that mean a 529 account is no longer a good idea? Absolutely not. Because while a 529 is generally referred to as a college savings account, it can be used for other types of education besides college. And recent tax laws give you even more options.

The most common—post-high school education

There are lots of ways kids can continue their education post high school, and a 529 is there to help them. Assets in a 529 can be used at any eligible institution of higher education. That includes not only four-year colleges and universities but also qualifying two-year associate degree programs, trade schools, and vocational schools—both at home and abroad. This means that whether your child wants to be a computer expert or cosmetologist, an artist or an electrician—and chooses to pursue post-secondary training in their chosen field—there’s a good chance you can pay for that training with your 529 assets.

In your son’s case, if he has another type of school in mind, find out if it qualifies for 529 assets. Generally speaking, to qualify, a school must be eligible to participate in student aid programs offered by the Department of Education. Savingforcollege.com has an easy online tool for determining if a particular school qualifies. You just need to take the time to do a little research—or better yet, have your son do it.

Possibilities before high school—and after college

A lot of parents will also be happy to know that the Tax Cuts and Jobs Act of 2017 gives families the option to use 529 assets to pay for up to $10,000 in tuition expenses at elementary, middle, or secondary public, private, or parochial schools. (Note that different states may have different restrictions.)

Plus—and this is good news for parents and college graduates alike—the SECURE Act of 2019 allows up to $10,000 of 529 assets to be used to pay off existing student loans. So wherever a student is on their educational path, a 529 can help ease the way.

Flexibility to change beneficiaries

Even if you don’t use the funds for your son’s education, you still have options. You opened the 529 for the benefit of your son, but the account belongs to you, and you have the right to change the beneficiary.

As long as the new beneficiary is a family member—a sibling, first cousin, grandparent, aunt, uncle, or even yourself—the money can be used for qualified education expenses without incurring income taxes or penalties. Qualified expenses include tuition, required fees, books, supplies, computer-related expenses, even room and board for someone who is at least a half-time student.

Most 529 plans allow you to change the beneficiary once a year, so that leaves the door wide open for future use. You could even convert it back to your son’s benefit should his plans change.

This flexibility gives you a lot of options. Let’s say you decide to go back to school. You make yourself the beneficiary and use 50% of the 529 assets for your studies. What do you do with the balance? You could simply change the beneficiary to another member of your family who could use it for their own qualified education expenses.

The problem with taking the cash

Taking the cash is always a possibility, but it will cost you. If assets in a 529 are used for something other than qualified education expenses, you’ll have to pay both federal income taxes and a 10% penalty on the earnings. (An interesting side note is that if the beneficiary gets a full scholarship to college, the penalty for taking the cash is waived.)

Since one of the main benefits of a 529 account is the federally tax-free earnings, I’d think carefully before cashing it out. And, really, it might be wise to sit tight before making any decisions. Your son may surprise you again by going in a whole new direction, and you’ll be glad you’ve kept those 529 assets in reserve.

A word of encouragement

While there may be some skepticism about the value of college these days, a 2019 report by the College Board found that higher education not only leads to greater employment opportunities and higher lifetime earnings, it’s also associated with a healthier lifestyle. Whatever your son’s current feelings about continuing his education, I encourage you to keep talking to him about his interests and ways to develop his skills—for his financial future as well as his future happiness.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.