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Matching College Funding to Educational Expenses

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When anticipating how to pay for college, you might just add up funding options and compare that to the big costs, such as tuition and books. If the expected funds match or exceed these big costs, then you can pay for college, right?

It’s actually a little more complicated than that. In reality, many funding streams — such as scholarships and some grants — have spending restrictions or tax implications, limiting what educational expenses those funds may pay for.

You should create a plan for how you will match each educational expense with the specific income stream with which you intend to pay it. First, research any spending restrictions or tax treatment rules for each of their education funding streams, and the consequences of using those funds to purchase nonqualified expenses.

Taxes and Qualified Expenses

The Internal Revenue Service (IRS) determines which expenses are “qualified expenses” for scholarships and savings plans (such as 529 Savings Plans or Coverdell Education Savings Accounts). Monies spent on qualified expenses typically are exempt from income taxes and penalties.

The list of qualified expenses differs for various funding streams. For example, room and board are not qualified expenses for scholarships or grants, but may qualify for coverage under a 529 Savings Plan if the person is at least a half-time student.

Tax treatment and qualified expenses for all savings plans, scholarships and grants are listed on the IRS Tax Benefits for Education: Information Center.

Mapping Income and Expenses

As you research spending restrictions for each income stream, add the information to the Mapping College Income and Expenses Worksheet. Next, list your expected expenses and possible income options to pay for each expense.

When matching the income stream with anticipated expenses, use the most restrictive funds first and ensure that the anticipated dates to receive the funds match the due dates for the expenses.

Use the College Budget Spreadsheet to plan your income and expenses month-over-month for the coming year.