06 Oct Pay tuition bills monthly or with lump sum?

Q. We have tuition for my son in a 529 plan. Is there an advantage to doing the college’s monthly payment plan or should we just make one large payment?
— Preparing

A. That’s a great question.

Generally, it is considered advantageous to spread out payments on a monthly basis, but there is no straightforward answer for 529 plans, said Cynthia Aiken, a certified financial planner with RegentAtlantic in Morristown.

She said there are two layers of questions for you to consider: monthly payment questions and distribution questions.

On monthly payments, find out if the college charges a fee for you to participate in the monthly payment plan or if the total payments are equal to the amount billed each term/semester.

Then find out if your 529 plan allows monthly distributions, and if are there fees from the 529 plan to do so.

Aiken said on the distribution side, you need to determine if the expenses on the college bill show qualified expenses or non-qualified expenses.

“In order for the distributions from the 529 plan to be withdrawn tax-free, the funds must be used for qualified expenses,” Aiken said.

Qualified expenses include tuition and fees, room and board, food, books and supplies, computer/laptops if required by the school. Internet fees and PDAs or smart phones may qualify if required, and special needs services required by special needs students incurred in connection with enrollment or attendance at school are also included, Aiken said.

Other typical college student expenses which are not considered qualified include: student loans, insurance, sports or club activity fees that are not required as a condition of enrollment, transportation to and from school and entertainment costs unless attendance is requisite to a course or curriculum.

“Taxes and a possible 10 percent penalty will apply to all distributions not considered qualified educational expenses by the IRS, so be sure to check first,” Aiken said. “If the specific expense items on the term/semester billing fall only under the qualified expenses, then you could elect a monthly payment schedule if your 529 plan allows.”

If the billing includes both qualified and non-qualified expenses, Aiken said, then the situation is more complex and you may be better off splitting the bill into qualified and non-qualified expenses and taking distributions from the 529 plan for the qualified expenses only.

The timing of the distributions you take from the 529 must match up with the payment of qualifying expenses in the same tax year, she said.

“If you make a 529 withdrawal in December, be careful that a payment to the school was made in the same tax year for the same amount,” she said.

The bottom line?

If the school doesn’t charge fees for the monthly payment program and if your 529 plans allows and doesn’t charge fees for monthly distributions, you should consider paying monthly, Aiken said.

Just be careful to identify qualified expenses and the timing of distributions and payments.

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This post was first published in October 2016.