Certified Financial Planner® John Gugle spent his sophomore year abroad attending Sophia University in Tokyo. “The opportunity to live and study outside the U.S.A. helped broaden my understanding of the world and ultimately helped provide career opportunities to work overseas for global companies,” Gugle says.
As part of Gugle’s work at Alpha Financial Advisors, LLC in Charlotte, N.C., he advises parents and students on how to utilize money saved in 529 plans, U.S. education savings plans with tax benefits, when studying overseas.
[Get tips for staying connected while your child is studying abroad.]
Parents of students considering studying outside of the United States should follow these three tips:
1. See if schools qualify to use 529 distributions: Students withdraw money from their 529 plan without a potential tax penalty if they attend a post-secondary institution that is “eligible to participate in a student aid program administered by the U.S. Department of Education,” says Internal Revenue Service spokesperson Eric Smith.
For students wanting to go to college outside of the United States, there are schools in other countries that are eligible, such as University of London or University of Toronto.
How would a parent know if a school is eligible? When clients first mention the idea of studying outside of the United States, Gugle tells them to see if potential schools are 529 plan-eligible using the Department of Education’s federal school code search. When choosing a state, select “foreign country” to find international schools.
Parents and students should then double check eligibility by calling the Department of Education’s Federal Student Aid Information Center at 1-800-4-FEDAID (1-800-433-3243), Gugle says.
[See the schools with the greatest number of students studying abroad.]
2. Consider currency exchange rates: What the American dollar is worth today in relation to foreign currencies may not be what it’s worth in a year or two. For instance, based on a calculation using the OANDA historical exchange rates calculator, students exchanging money during the first week of May 2012 might have paid about 5 percent more for British pounds than if they had exchanged their money in the first week of June 2012.
To avoid gambling on changing exchange rates, Gugle advises buying a currency forward contract, a financial instrument that locks in the exchange rate at current prices, through a bank to avoid risking the ability to pay a tuition check if the value of the U.S. dollar drops compared to the currency value where the student will attend college.
[Learn where to find scholarships to study abroad.]
3. Save for travel costs: Parents should consult their tax professional as to whether they can save for student travel costs via a 529 plan, says Certified Financial Planner® Karla McAvoy of HC Financial Advisors, Inc. Regardless of the answer, parents should plan for this potentially large expense.
Before estimating costs, McAvoy recommends calling the study abroad or international student offices at schools your son or daughter is considering attending. Ask about how often students generally travel home, as well as types of activities international students choose and local transportation typically utilized. For instance, don’t calculate needed funds for local transportation based on the bus when most students take cabs or trains.
Reyna Gobel, frequently quoted as an expert on student loans and college costs, is the author of “Graduation Debt: How To Manage Student Loans And Live Your Life” and “How Smart Students Pay for School: The Best Way to Save for College, Get the Right Loans, and Repay Debt.” She has appeared on PBS’s Nightly Business Report and speaks regularly at CollegeWeekLive.