Eligible Expenses

There are several benefits to saving money for college through college savings accounts such as 529 plans and Coverdell Educational Savings Accounts (ESAs). You save money for this large expense ahead of time, it grows with interest and you aren’t taxed as long as you use the funds to pay for eligible, or qualifying, educational expenses. If the funds are used for something else, the withdrawal is taxed at the normal income tax rate, plus an additional 10 percent fee.

Here is a look at what generally may qualify as tax-free educational expenses for 529 plans and ESAs.

Expense Eligible Ineligible
Tuition    
Room and board (on- or off-campus)    
Required student activity fees    
Course books    
Computer or laptop    
Special needs expenses    
Optional student activity fees    
Medical expenses, including student health fees    
Health insurance    
Transportation    
Tickets for college sporting events    
Athletic fees    
Living expenses    
Non-credit courses    
Student loan payments    

You have several options for covering ineligible expenses, including savings outside of college savings accounts. Private student loans also may help cover ineligible educational expenses, such as living expenses or student activity fees.

Education Credits

Certain payments that you make to cover your child’s college expenses may be eligible for a type of tax break, called an education credit, through the IRS. These expenses include tuition, certain fees, and books and supplies. Here is what you need to know about education credits:

  • You must pay the expenses for an academic period that starts during either the tax year or the first three months of the next tax year.
  • To receive credit, you, your child or a third party (e.g., grandparent) must make the payment.
  • You can pay for these expenses via cash, check, credit or debit card, or money from a loan.
  • If you use loan money to pay for expenses, you must take the credit for the year you pay the expenses.
  • The American Opportunity Credit (AOC) allows you to deduct expenses for required school books, supplies and equipment (even if the payment doesn’t go to the school). For example, the cost of a required book purchased online or at an off-campus bookstore is an eligible expense.
  • To qualify as an eligible education expense under the Lifetime Learning Credit (LLC), the school must require the payment, such as a student activity fee, as a condition of enrollment or attendance. You must also pay the school directly.

Education Credit Eligibility

Expense Eligible Ineligible
Tuition    
Course books    
Computer or laptop (under AOC only)  
Required student activity fees
   
Optional student activity fees    
Medical expenses, including student health fees
   
Health insurance
   
Transportation    
Tickets for college sporting events   (unless required for degree)
Athletic fees    
Living expenses    
Non-credit courses    

Section Complete! Here's how you did: