Some parents do not want to enroll in Plan 529 because they are not sure what happens in the future of their children. Scholarships provide financial help to the family and students can easily earn their college education. Students can save their college expenses to some extent with the help of scholarships. You should not only rely on scholarships because you may or may not win the scholarship. So, you should save money with a 529 account. Here, you will learn what are 529 plans and how scholarships impacted the 529 Plan.

What is a 529 Plan?

529 is a plan that is designed to help students in many ways because it is a tax-advantaged saving vehicle in the United States. It is specially made to help families and individuals to save money for future education expenses. To cover qualified educational costs, the plan named after section 529 of the internal revenue code, provides you the ways to invest your money that can grow over time. So, you can use the funds that are available in your 529 plan to pay for various education-related expenses. The list of these expenses includes tuition, fees, books, room and board, supplies, etc. Sometimes, it also includes K-12 private school tuition costs. The 529 plan is categorized into two types namely Prepaid Tuition Plan and Education Saving Plan.

Prepaid Tuition Plan: This plan allows you to prepay your college expenses for eligible college at today’s rates and then you can take the college benefit in the future. It is a kind of hedging. In simple terms, it means you are hedging against inflation that may happen shortly as you buy your education at the present market rate. The only limitation with this plan is that you can cover the cost of tuition and fees only, nothing beyond that.
Education Savings Plan: These are the plans that work similarly to the investment accounts. The investment options that are available for your contribution are ETFs, mutual funds, and other securities. The investment options and the returns may vary as per the plans. The earnings of these investments are tax-free while paying for the education expenses after withdrawal because the growth of these investments is tax-deferred.

A 529 plan is one of the valuable tools as it is specially designed to cover higher education expenses.

What happens to 529 if a Child gets a Scholarship?

When a child gets a scholarship from any university or college, it impacts 529 plans in various ways including taxation. If you have unused funds in your 529, you can use them without any penalty. So, let’s understand the impact of the scholarship on the 529 plan.

Using 529 Plan for Qualified Expenses: After getting a scholarship, you are still eligible to use your 529 plan for the qualified expenses. Scholarships cover the cost of tuition, fees, supplies, books, room, board, etc. For qualified expenses, you can use the 529 plan without incurring any penalties or taxes. You should follow the rules of the 529 plan because it may have varying policies for the treatment of the scholarship. Therefore, you are not restricted by the rules to use a 529 plan for qualified expenses.
529 Plan for Non-qualified Expenses: If you are planning to use a 529 plan for non-qualified expenses, then you need to pay income tax. When the scholarship amount exceeds the total qualified education expenses, in this case, you can use your earnings portion of the 529 plan by withdrawal and have to pay a penalty of 10% as income tax. Using 529 for qualified education expenses is not subject to any penalty.
Change in the name of the Scholarship Beneficiary: You have the option to change the beneficiary name of the 529 plan. It means if you received a scholarship and do not want to use 529 plans then you could change the name to another family member as a new beneficiary. Another member should be a sibling the funds available in 529 can be used for the future education needs of the beneficiary.
ABLE Account for Disabled Children: The ABLE Account is similar to the 529 Plan. It is specifically made for children who have disabilities. It offers tax benefits to the individuals for qualified expenses and it doesn’t risk any other government benefit that is available for the disabled child. ABLE Account stands for Achieving a Better Life Experience.
Avoidance of Penalty: For saving the penalty on the earning portion of the non-qualified withdrawal, you have to withdraw the amount that is equal to the scholarship from the 529 plan. This will help you in saving a penalty to some extent and then you only have to pay the penalty on the additional withdrawn.
529 Plan for Additional Education: If you are getting the scholarship and using that scholarship amount for your undergraduate expenses but also you want to enroll in any additional education or course which is not covered under the scholarship. In this case, you can use your 529 plan and retain funds for paying for the additional education even without any penalty.

So, these are the uses of the 529 plan even after getting a scholarship. 529 plans are beneficial and provide are kind of additional support to the students.

Conclusion

529 plans are very beneficial and students can use these plans even after getting a scholarship. Before making any significant decision regarding a 529 plan, you have to follow all the complex tax laws, and other scholarship regulations and consult with a financial advisor who can suggest to you the best treatment of 529 funds along with the scholarship amount. You must secure the advantages of a 529 plan as it provides various financial benefits which can help you in covering the cost of future education. You can use 529 funds for qualified expenses, and unqualified education expenses, and can also avoid penalties, etc. So, you can optimize the use of both scholarship funds and the 529 plan funds.