Kelly Phillips Erb Senior Contributor
April 30, 2020
Every Friday evening, my husband’s college friends have a Zoom happy hour: it’s practicing social distancing and being social at the same time. The conversations have been dominated, of late, by the COVID-19 pandemic and how it’s affecting our families. One popular gripe? College tuition and room and board.
During the pandemic, students are being sent home from college, and some classes are being canceled. That means students are left with semesters cut short or a move to online courses, leaving unused or barely touched housing and meal plans. Schools are dealing with this in different ways. Some are offering partial tuition and fee refunds, while others are choosing to keep fees intact, suggesting that the underlying expenses (like administration and the costs of paying faculty) haven’t really changed.
According to Inside Higher Ed, 90% of parents with children already enrolled in college say they are not “comfortable” with the current landscape. That number ticks up a little – to 93% – for parents of students attending private institutions. Of those, 47% expect a “meaningful reduction in price.”
Mark Kantrowitz, publisher of SavingForCollege.com, reports that about 70% of colleges are offering refunds. The refunds are typically 40%-60% of the room and board cost for the spring semester.
For those parents who are fortunate enough to get a partial refund of tuition and fees, there are some potential tax traps. Let’s start with the obvious: tax deductions and credits.
According to the Internal Revenue Service (IRS), a refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year.
You should also pay attention to the source of the funds. If you’re paying as you go from already-taxed funds, or from loans, there’s typically no tax impact to you when you receive a refund. But if you receive a refund of funds that you originally paid out of a tax-favored account, there may be tax consequences.
If you return money from a 529 college savings account to the account – for the same student – it remains tax-free. Generally, the money has to be put back within 60 days of the refund (that’s the result of the PATH Act). But the IRS made clear in Notice 2020-23 that if the 60 day period ends between April 1, 2020, and July 15, 2020, you can stretch the return of the contribution to July 15, 2020.
The College Savings Foundation warns that refunds of money that originated from a 529 plan could be subject to federal and state taxes and penalties if it remains outside of the plan and is not used for qualified educational expenses. If you don’t return the funds to the account, they could be considered non-qualified distributions and subject to tax and a 10% tax penalty. But if you’re headed back to school this year, you may want to hold onto the money: check with your financial advisor or a tax professional for more info.
There’s additional tax relief for families who qualify for grants and other free money. Students who receive emergency financial aid grants under the Coronavirus Aid, Relief, and Economic Security Act (or CARES Act) qualify for tax-free treatment under section 139 of the Tax Code. And you already know that some students may be eligible for the Economic Impact Payments (EIP), or stimulus checks: those are tax-free, too.