What happens to my college fund if my child gets a scholarship? 529 College Savings Answers

When our readers and users of FreshmanFund.com send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.

What happens to my 529 if my child gets a scholarship?

The parent or sponsor of a 529 college plan is the legal custodian of the funds, and the rules for withdrawals are pretty specific. You can use the money for college/secondary tuition and certain related expenses, such as room & board, books, supplies like a computer, etc. A car for college is probably not going to cut the mustard, the relationship between the object and your student's success at school must be pretty strong.

If you have a good chunk of money saved in your child's college fund (good for you!) that they don't end up using, your options are to transfer the fund to another beneficiary, a child or relative (or yourself, you can use it for post-secondary education as well) hold for the student incase they need it down the road, or cash it out. If you cash out, any gains are taxed and you incur a 10 percent penalty. If your child received a scholarship, the penalty will not apply to an amount equal to the scholarship, but the taxes still do.

To read up on what makes an educational expense "qualified" or not, from the point of view of our friends at the Internal Revenue Service, check out Publication 970 Tax Benefits for Education, and look for the 'Qualified Tuition Program' chapter.