You cannot use a 529 plan to pay for travel and transportation costs. The earnings portion of a distribution from a 529 that is used to pay for travel and transportation expenses will be considered a non-qualified distribution. Non-qualified distributions are taxable at the beneficiary’s rate, plus a 10% tax penalty, as well as recapture of state income tax benefits attributable to the distribution.
This applies to all travel and transportation costs, including transportation to and from the college and travel for international study and study abroad programs.
However, there may be an exception if the university charges any travel and transportation costs as part of a comprehensive tuition fee, or the fee is identified as a fee that is “required for enrollment or attendance” at the college.
A college’s official cost of attendance, as defined in the Higher Education Act of 1965, includes an allowance for transportation expenses. The definition of qualified higher education expenses in the Internal Revenue Code of 1986, however, is different. It does not include transportation expenses, miscellaneous personal expenses, dependent care costs, loan fees and licensing fees, and room and board is limited to students who are enrolled on at least a half-time basis.
Qualified higher education expenses are limited to tuition, fees, books, supplies, equipment, special needs services, computers (including peripherals, software and internet access), and, if enrolled at least half time, room and board.
Students can ask their college to increase the cost of attendance to reflect their actual travel and transportation costs. However, the family will still not be able to use a tax-free distribution from a 529 plan to pay for the travel expenses. Increasing the cost of attendance may enable the student and parents to borrow more federal education loans to cover the costs.
Some colleges have emergency aid funds that may cover the cost of repairs to the student’s car if the student is a low-income commuter student. But, emergency aid funds will generally not cover the cost of routine travel costs, except perhaps the cost of public transportation.