Use College Savings to Pay for Classes Not Covered by Financial Aid

Jennifer Dorcy always thought she would go to college, but wasn't sure it was right for her. However, the 19-year-old felt she was expected to become a college graduate.

So she dipped her feet in college waters at the University of Washington for a quarter, taking a psychology class and a history class. She paid for those courses with prepaid tuition credits that her mother, Kathleen, purchased through the state of Washington's 529 plan. Prepaid tuition credits are a special kind of the tax-advantaged college savings accounts known as 529 plans.

Since Dorcy wasn't a matriculating student and wasn't seeking a degree, she wasn't eligible for financial aid such as certain loans or grants.

Like Dorcy, not all students will pursue a four-year degree, two-year degree or even a certificate. Some just need a class or two to learn a specific skill or want to test out whether college is right for them. But according to the U.S. Department of Education, students applying for federal student aid must be enrolled in an eligible program as a regular student seeking a degree or certificate.

[Take these steps before using 529 plan savings.]

While students can't use financial aid for this course work, families can potentially tap into 529 plan resources to cover expenses, as the Dorcys did. To do so, they should take the following steps.

Step 1: Check school eligibility in the Department of Education's Database of Accredited Postsecondary Institutions and Programs, says Michael Conrath, head of the 529 program at J.P. Morgan Asset Management.

In order for a family to use 529 plan funds for any postsecondary program -- from technical training schools to four-year universities -- without being subject to a tax penalty, the program must be accredited by an agency recognized by the Department of Education.

[Avoid these mistakes college savers often make.]

Step 2: Families should also check with the institution to verify if it qualifies as an institution at which students may use 529 plan funds. The Department of Education's website mentions the database may not be up to date. It's important to call the school to verify eligibility before using 529 plan savings, says Betty Lochner, chairwoman of the College Savings Plans Network.

Since the accreditation rule is the same for using 529 plan funds as federal financial aid, families can simply ask if the school offers federal financial aid. Generally, the difference between whether students also have financial aid as an option is whether they are degree-seeking or enrolled with at least half-time status, Lochner says.

Step 3: Students who may want to also use financial aid should check with the school they plan on attending about their status. Depending on the school's definition of half-time status and its rules for undeclared majors, they may be able to qualify for financial aid while thinking about whether they want to continue attending and get a full degree.

Remember, situations change. Students may start not seeking a degree or certificate and then decide to pursue one, Lochner says.

[Find out how community college students can use 529 plan savings.]

Dorcy decided against a four-year degree, but she's now looking into practical experience interning at Seattle restaurants. She's also looking at culinary schools where she would like to continue her education, potentially until earning a degree or completing a certificate. She may then have options for using her 529 plan tuition credits, financial aid or a combination to pay for the program.

Dorcy says she didn't feel passionate about her college course work. But she's grateful that the money in her 529 plan gave her the opportunity to start figuring it out.

Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.