Using 529 plan savings to pay for a gap year

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A "gap year", which is typically taken after high school graduation, is a time for students to explore areas of interest before they begin college. There are a number of programs available that give students an opportunity to take a break from the traditional classroom environment and gain independence, including studying abroad, volunteering and completing wilderness courses such as Outward Bound.

Are there benefits to participating in a gap year program?

In addition to personal development, a gap year program may help a student's chances of getting into a prestigious school. In fact, according to Jason Sarouhan, Vice President of the Center for Interim Programs, a gap year consulting firm, although college applications are typically completed before a student finishes high school, their aspiration to participate in a gap year program is viewed positively by admissions officers.

"Studies have shown that students who have taken gap year programs have a greater sense of independence and don't partake in as many first year shenanigans as those who started college right after high school," he says.

"Gap year programs have been proven to increase students' levels of confidence, competency and resilience," says Sarouhan. "Many top schools encourage gap year programs, including Tufts University, Princeton and Harvard."

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Interest in these types of programs has grown substantially in recent years. In fact, according to the American Gap Association, gap year fair attendance in the U.S. has seen a 294% increase since 2010. The recent spike in popularity could be attributed to historically low acceptance rates at the nation's top schools. As competition to get in becomes more intense, students often become drained after devoting a large portion of their senior year of high school to completing college applications while keeping up with their regular schoolwork. And unlike past generations, many of these students were so committed to getting into college that they lack any sort of work experience from a part-time job.

Using 529 plan savings

Tuition costs continue to skyrocket, but there are some cases when a family might end up with excess funds in their 529 college savings plan. For example, if a student's parents planned for him to attend a private university, but he ends up getting accepted into West Point, they may wonder what to do with the money they saved in a 529. If they withdraw the funds to pay for non-qualified expenses, the earnings in the account will be subject to federal income tax. (Normally there would also be a 10% additional tax on the earnings, but this penalty is waived when a student attends a U.S. Military Academy).

To avoid paying any taxes on leftover 529 savings, families can save the funds to pay for another child's (or even a future grandchild's) higher education, or, in some cases they may be able to withdraw savings tax-free to pay for gap year program credits.

RELATED: When your child wants to attend a U.S. Military Academy

For example, Outward Bound, a leading outdoor education provider, has recently partnered with Western State Colorado University to offer programs that award college credits to students upon successful completion. According to Jason Stout, National Outreach Director for Outward Bound,

"Although Outward Bound is more than 50 years old, it wasn't until recently that families could use their 529 plan to pay for this type of education. Now that the word is getting out, we are seeing a lot of excitement from parents and students who tell us that this is another great benefit to investing in a 529 plan."

Per IRS rules, qualifying 529 plan expenses include those related to enrollment or attendance at any eligible postsecondary education institution, which means you can use your 529 funds to pay for a gap year program offered through almost any school. But keep in mind that not all colleges will accept transfer credits from another school's gap year program, and not all gap year programs offer college credit.

In addition to providing an affordable gap year option that can be funded with a 529 plan, Outward Bound provides students with an educational experience that helps build character, develop personal insight and learn some of life's important lessons. The non-profit organization was founded in 1941 and currently offers over 1,000 courses across the globe. Sarouhan, an Outward Bound alum, says he still applies these values to his daily life, and that participating in the program allowed him to "form a sense of identity". A complete list of schools that offer academic credit for Outward Bound expeditions can be found here.

RELATED: Will taking a gap year help me get into the Ivy League?