Tips on Spending the Money in College Savings Accounts

Here are some questions and answers about paying for college with a 529 account:

My daughter may have to borrow for college. Should she spend all of her 529 money before taking out student loans?

Families often spend down 529 funds first so they can wait as long as possible to take on debt. But it may be better to borrow as you go rather than waiting until the 529 is drained, advisers say.

“I suggest spreading it out over four years,” Mr. Kelly said, referring to the 529 balance.

That’s because there are limits on the amount of low-interest federal student loans that can be borrowed each year (and in total). Once you have missed the borrowing deadline for a given year, you can’t tap those loans retroactively. If it turns out that the remaining amount available to borrow is insufficient, you may need federal Plus loans, which carry a higher interest rate, or private student loans, which lack important borrower protections.

Under a law passed last year, up to $10,000 from a 529 account can be used to repay the beneficiary’s student loans. So if you end up with leftover money in a 529, you can use the money toward the student loan balance.

Do I have to spend the money I withdraw from the 529 right away?

Generally, withdrawals from a 529 must be made during the same calendar year that the expenses are paid. Families should be particularly careful about spring tuition bills, advisers say, because academic years span two calendar years. The spring term often begins in January, but colleges may send out the bill in December. If you withdraw the money in December, make sure to pay the bill before Jan. 1. Similarly, if you wait to pay the bill in January, you should also withdraw the money after Jan. 1.

“If the timing is off, you risk owing tax because it’s considered a nonqualified withdrawal,” according to Fidelity.

Do 529 plans have withdrawal deadlines?

No. You can keep funds in a 529 plan indefinitely. If the account’s beneficiary doesn’t need all of the money for college — perhaps because of scholarships — the money can be used to pay for graduate school. Or the beneficiary can be changed to a sibling or another family member so the funds can be used to cover their college costs.