Question Summary: Is the purchase of a car considered a qualified higher education expense for 529 plan purposes?
Answer Summary: The purchase of a vehicle using 529 plan funds is considered a non-qualified distribution from the 529 plan.
There may be some confusion between the definitions of college costs used in the Higher Education Act of 1965 and in the Internal Revenue Code of 1986.
The Higher Education Act of 1965 defines Cost of Attendance in 20 USC 1087ll as including "an allowance for books, supplies, transportation, and miscellaneous personal expenses, including a reasonable allowance for the documented rental or purchase of a personal computer, for a student attending the institution on at least a half-time basis, as determined by the institution."
The definition of qualified higher education expenses in the Internal Revenue Code of 1986, at 26 USC 529(e)(3), does not include an allowance for transportation. Rather, it defines qualified higher education expenses as including "tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution." There is no mention of transportation in this list.
Moreover, the definition of transportation used by colleges in their cost of attendance allowances focuses on the incremental cost of transportation to/from the college, not the purchase of a vehicle. Typically, colleges base the transportation allowance for commuter students on the distance between the student's residence and the college campus, multiplied by the IRS mileage reimbursement rate, with an assumption of one round-trip per weekday. For residential students, colleges base the cost of round-trip airfare or bus/train tickets for residential students. Some colleges use a low figure and assume that students who have greater transportation costs will appeal for an adjustment.
