First of all, congratulations! Earning a scholarship is a big deal and your student likely worked hard to receive it. You’re probably relieved that this scholarship will reduce some, or maybe even all, of what you’ve been planning to cover in college expenses. So, what do you do now with the college savings you’ve put away for your student’s college costs?
What you can do with your savings depends on what the scholarship covers. If it’s a partial scholarship that doesn’t cover your student’s full cost of attending college, there will likely be qualified higher education expenses you’ll still need to pay for. These expenses can include tuition, fees, room and board, a computer and associated equipment, supplies, and other required costs of college at the institution your student will attend. When you make withdrawals from your 529 account to pay these costs, your withdrawals will be qualified and earnings on your account stay tax-free since you are using your savings as planned. If your student’s scholarship is a “full ride,” then the money you put aside may not be needed at all.
The good news is, if there is any money left in your account after your student finishes his or her undergraduate education, your savings can be used towards a graduate or professional program as well. If your student is heading to a graduate or professional program, you can keep making withdrawals from your account to continue paying your student’s college expenses. However, if your beneficiary stops with an undergraduate degree and there is money still left in your 529 account, there are a few things you can do. You can change the beneficiary on the account to another family member who is heading to college, or you can transfer the remaining money to that family member’s account if there is already a 529 account in his or her name. As long as these funds continue to be used for educational expenses, earnings are not subject to federal or North Carolina state taxes.
Whether your student is awarded a partial or a full scholarship, you may choose to withdraw money from your 529 account in the amount of the scholarship or tuition waiver; however, the earnings portion of such a withdrawal will be subject to federal and state income taxes. You and the institution awarding the scholarship will need to certify your child is receiving the scholarship and how you plan to request the withdrawal. If your account is in North Carolina’s National College Savings Program (the NC 529®Plan), contact the Program Administrator at 800.600.3463 for more detail and assistance.