Can You Use a 529 Plan to Buy or Rent a Car?
You cannot use a 529 plan to buy or rent a car. Transportation costs, including the costs of purchasing and maintaining a car, are considered non-qualified expenses. Students can save on transportation costs by renting a car, using a rideshare service or riding a bike or electric scooter to class.
Qualified 529 plan expenses
Qualified 529 plan expenses are limited to costs required for enrollment or attendance at an eligible college or university. This includes
- Computers and internet access
- Room and board if the student is enrolled on at least a half-time basis
- Special needs services for a student with special needs
The earnings portion of a non-qualified 529 plan distribution is subject to ordinary income tax and a 10% penalty. Any state income tax benefits attributable to a non-qualified distribution may be subject to recapture.
Leftover funds in a 529 plan can be saved for graduate school, saved for a future grandchild or transferred to a qualifying family member. You can also withdraw up to $10,000 per year tax-free to pay for tuition at a private K-12 school.
Some colleges include an allowance for transportation in their Cost of Attendance, which is the figure used to determine a student’s need-based financial aid eligibility at the college. However, the transportation allowance included in a college’s Cost of Attendance generally includes the incremental costs related to traveling to and from the college, such as the cost of traveling home during breaks in the academic year. The Cost of Attendance does not include the cost to buy or rent a car.
Buying a car for college
Students are not required to have a car during college. In fact, some colleges prohibit freshman students from having a car on campus. But for some students, especially those who live off-campus and commute to class, having a dependable ride is a necessity.
Cost is the biggest consideration when buying a car for college. According to research from Kelley Blue Book, the average price of a compact car is just over $20,000, and that doesn’t include costs of insurance, gas, maintenance, parking fees and annual registration fees. Parking on college campuses is especially expensive and parking spaces are not guaranteed. Parents should also prepare for unexpected costs, such as damage from car accidents, speeding tickets and parking violations. Unpaid parking and library fines can prevent a student from graduating.
Renting a car in college
Students can save money by renting a car instead of buying one. For a visit home or a spring break road trip, students may consider renting from a traditional car rental company such as Hertz or Alamo. However, in most states you must be at least 21 years old to rent a car. In Michigan and New York drivers must be at least 18 years old. All car rental companies charge a daily “young driver” surcharge for drivers who are under 25 years old.
Car sharing might be a good option for students under age 21, who take occasional trips to the grocery store, the library or a sporting event. Zipcar offers a discounted monthly rate for students that includes gas and insurance. Enterprise also has a car sharing program for college students and offers fuel-efficient electric cars at some campuses.
Students who prefer not to drive can use a ride sharing service like Uber or Lyft. There are also carpooling apps, such as Zimride by Enterprise and Waze Carpool, which allow students to find other students to share a ride with.
Alternatives to cars in college
Cars are not the only option for getting around a college campus. Bicycles are still a popular option, and many campuses offer bike share programs. Students can also consider buying an electric scooter or use an app-based pay-as-you-go electric scooter service.
Many college campuses also have shuttle busses to take students to and from class. Depending on what city the college is in, there may also be low-cost or free access to the city’s public transportation system.
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