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Tribune News Service: Colleges plan refunds because campuses closed early. CSF was quoted in this syndicated story on 529 and college refunds.

May 4, 2020

By Steve Rosen Tribune News Service (TNS)

Apr 20, 2020

Prepare to hit the reboot button on your 529 college savings account if it was tapped to pay for room, board and other costs this school year.

That’s because many colleges and universities plan to offer full or partial refunds to parents or students after campuses were closed and classes moved online to slow the march of the coronavirus infection.

Some schools have said they plan to prorate charges for room and board based on the date students had to pack up and move out. Some schools have already started refunding money, while others have indicated they will.

What about tuition? Few, if any, schools plan to rebate tuition because classes are still taking place, albeit in different venues.

The rebates present a potential tax risk for parents and students who originally used their 529 college savings account to pay some or all of these education costs. There could be withdrawal penalties, too.

Generally speaking, because the refunded amounts are no longer being used for qualified educational expenses, the Internal Revenue Service could reclassify the money as taxable distributions, said Chris Gullotti, a financial adviser with Canby Financial Advisors in Framingham, Mass. He covered this potential tax risk in a recent blog post.

As with many other complicated tax issues that have cropped up in the wake of the pandemic, the IRS has issued some instructions on how to avoid problems with your 529.

According to the IRS, account owners can “recontribute” refunded money into their 529 plans. The catch: This generally must be done within 60 days of receiving the refund.

If the refund is not recontributed by the deadline, it will be considered a non-qualified distribution, unless it was used for other qualified educational expenses in the same year, said Mark Kantrowitz, the publisher of Savingforcollege.com.

For example, if a student gets a pro-rated room and board refund from vacating the dorm, but then buys a computer and pays for internet access for online classes, “this might be OK,” Kantrowitz said. That’s because computer equipment, software, internet access and other similar purchases are qualified higher education expenses for 529 plans.

To avoid tax unpleasantries, the nonprofit College Savings Foundation is urging affected 529 account holders to take care of the recontribution as soon as possible.

Gullotti recommends taking the following steps to make sure everything is done correctly:

—First, contact your 529 plan provider, which may have specific requirements for documenting recontributions.

—Document and save the refund information in case the IRS ever challenges the recontribution. “Remember, you should only recontribute the portion of the refund paid for by your 529 plan,” Gullotti said.

Gullotti suggests sending a check, rather than an electronic payment, for the amount going back into the 529, so there’s a paper trail.

One more potential complication: Some schools are issuing vouchers or credits toward future college costs, and these coupon refunds are already being challenged in the courts.

For now, if the refund is provided in cash, it does not affect the student’s financial aid eligibility, Kantrowitz said. But if a voucher or credit is issued, it will be considered estimated financial aid and will reduce the student’s eligibility for future need-based financial aid, he said.

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During these changing times, the College Savings Foundation recollects wise words once spoken by Nelson Mandela, “Education is the most powerful weapon which you can use to change the world.” CSF’s education savings mission serves families and individuals of all income levels and ethnic backgrounds across the nation.