How to Use a 529 Plan if Your Child Doesn’t Go to College

A mother embraces her daughter as she puts a coin in the piggy bank.

It's official: You are a super-parent. You looked ahead and, with love in your heart and financial sense in your head, you set up a 529 college savings plan for your child's future education. You contributed to their college fund from early on, confident in your investment—until, one day, your child decides not to go for that diploma.

A 529 plan is great for college savings, but you're essentially rolling the dice on whether an infant will want to pursue a college degree in 18 years. If your child doesn't go to college, withdrawals from their 529 plan could be penalized and taxed, taking a chunk out of years of investments. However, you can still transfer or otherwise utilize your hard-earned savings without trimming off too much in taxes. Read on to learn how.

What Is a 529 Plan?

A 529 plan is an investment account geared specifically for future education costs. Sponsored by states and schools, 529 plans offer tax advantages for investing in your child (or grandchild or other family member) and their future. College is notoriously pricey these days, and 529 plans are among the best ways to save up for the bill.

A parent or other family member makes regular, tax-deferred contributions to a 529 to grow their beneficiary's college savings over the years. When it's time to pay tuition or other eligible school costs, you can withdraw your contributions and earnings tax-free.

What Happens if My Child Doesn't Go to College?

Withdrawals from a 529 plan must be for legitimate education-related expenses, or will result in a 10% penalty tax on the money you take out. Plus, you'll be responsible for federal and state income tax on the earnings.

Each 529 plan has limitations and specifications regarding what, exactly, the money can be spent on. In recent years, federal law expanded the scope of many of these plans to include a wider range of applications, like using 529 funds for K-12 expenses and professional schools. The specifics vary by state.

In general, you can expect 529 plans to cover a wide range of higher education expenses, including apartment rent, supplies and tuition. However, if your beneficiary joins the military or decides to travel the world rather than hit the books, you'll need to pay if you want to use your investment earnings to remodel your kitchen.

How to Use a 529 Plan Without Penalties

The simplest action you can take when your child decides not to go to college is to wait. Your 529 plan will still be there if your kid shows up in a year or two suddenly bursting with scholastic ambition. And even if they don't, you may be able to put the funds to other eligible use.

A variety of expenses beyond typical college costs may be eligible under your 529 plan. For example, apprenticeships can qualify, as well as K-12 education, trade schools and vocational institutes. Find out by state what your 529 plan includes to see where your money can be best put to use.

You can even use the money to pay off some student loan debt in the family. If your child doesn't use all of their 529 funds, you'll be able to use up to $10,000 to pay off their student loans. If one child doesn't go to college at all, you can use their funds to pay up to $10,000 in student loans for each of their siblings.

Transferring your 529 funds from one beneficiary to another family member is also an option. For example, maybe your first child is taking a less-scholastic path than your 529 plan provides for, but you have another kid shaping up to be the doctor in the family—those unused 529 funds can go to help pay for medical school. Or perhaps you or your spouse would like to earn an advanced degree—529 funds apply. Switching beneficiaries on a 529 plan is relatively simple and can be done once a year. So, whether you want to give the gift of education to your mother-in-law or transfer the savings to a nephew in need, you have options.

The Road Ahead

Whatever you choose to do with your 529 plan, you can feel confident your years of savings won't be worthless. You can use your investment to benefit your family's future, no matter what it holds.