What Happens to Your 529 Plan if Your Kids Don't Go to College?

If the idea of having to put your kids through college is daunting to you, you're no doubt in good company. The average cost of tuition and fees for private college was $39,723 for the 2022-2023 academic year, according to U.S. News and World Report. It was also $22,953 for out-of-state students at public colleges and $10,423 for students who attended college in their respective home states.

When it comes to saving for college, you have some options. You could keep your money in a savings account, but that might limit the extent to which it's able to grow. That's because you're not investing that cash and are only collecting whatever interest your bank is paying. You could also keep your college funds in a regular brokerage account, where you can invest your money in the hopes of growing it nicely.

You may have, however, decided to invest some money for college in a 529 plan. These plans don't give you a federal tax break on your contributions like a traditional IRA or 401(k) (though some states provide a tax break). But gains in your account are yours to enjoy tax-free, and withdrawals are tax-free, provided that money is used for qualifying educational expenses. 

But what if you fund a 529 plan for your kids' college expenses, but they decide not to go to college? In that case, you're not out of luck. Here are some options you can look at.

1. Use the money to pay for non-college education

If you use 529 plan funds for non-education purposes, you'll face a 10% penalty on the gains portion of your withdrawals. You'll also be subject to taxes on those gains. 

But one thing you should know about 529 plans is that they're not just for college. You can use money in a 529 plan to pay for private elementary, middle, or high school. 

So, let's say you have an older child who's decided they don't want to go college, but you have a younger child who's enrolled in a private school. You could simply use your money for those private school bills if you don't need it for college bills.

2. Reserve the money for other beneficiaries 

One really nice thing about 529 plans is that they give you the flexibility to switch beneficiaries as you see fit. So, let's say your kids decide they're not interested in college. You could then just hang onto your money, see if your kids have kids, and then make your grandchildren the new beneficiaries on your account. 

You can also designate a niece or nephew as a beneficiary for your 529 plan if they need money for college and your kids aren't going. Or, you could decide that you want to go back to school for a master's degree and spend the money on your own education.

Fund a 529 plan with caution

If you're certain you'll be facing college expenses for your kids, then funding a 529 plan is a smart move. But before you put money into one of these plans, have a conversation with your kids about their intentions.

Granted, you may want to start saving for college when your kids are really young, and they're hardly going to know whether college is of interest or not in first or second grade. But as your children get older, start having those talks so you can invest your money in the most savvy manner.

Even if you're drawn to a 529 plan for college savings purposes, you may want to spread your money around a bit by putting some into a 529 and the rest into a regular brokerage account. With the latter, you get a lot more flexibility, so it may be worth giving up some tax-free gains in exchange.