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529 Advice for Parents of Gap Year Students

Make sure a student's college acceptance, scholarships and savings will stay in place during a gap year.

A woman with a jar of quarters.

A gap year can be an excellent opportunity to stash extra money for college, but avoid using a 529 account for these short-term savings.

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Taking a year or two off between high school and college can offer some big benefits for students and parents. Not only is it a way for many students to mature, learn about themselves and develop life skills, it offers parents a bit of extra time to save for college.

That's what Utah mom Becky Parry has seen. She saved for college for all five of her children. The two years she expects each of her children will spend on a religious mission will give her time to put in enough extra dollars to cover their textbooks.

Her eldest son, 22-year-old Evan,​ returned from his mission trip to Japan with enough language skills to test out of 16 credits of Japanese at Brigham Young University—Provo. Her second oldest child, 20-year-old Jake, is improving his Spanish while serving in Arizona, then he too will attend BYU.

Whether these breaks – known as gap years – are taken immediately after high school or later, how much they will help a student depends on how the year is spent and what it means for both college admissions and scholarships.

Experts recommend the parents of gap year students who are saving for college do the following.

[Check out last-minute ways to give college savings a boost.]

1. Verify that admission and scholarships are still valid ​if a student delays attendance: College acceptance may be denied for a different semester than the one for which the student originally applied, especially at highly competitive schools, says Mary Anne Busse, managing director of Great Disclosure, a consulting firm that specializes in helping 529 plan managers. A student could be accepted for a specific semester and then denied the next, she says.

A student could also have won community and collegiate scholarships that could have expiration dates. "A lot of work goes into applying for scholarships and competition is fierce," says Susan Tillery, a Georgia-based certified public accountant and personal financial specialist. "​I’d hate for someone to lose a scholarship if they didn’t take time frame into account."

However, scholarships that must be used in a specific time frame may have an exemption for military or religious service, among other reasons.

2. Ensure savings can be used in the future: Students taking a year off may also have to worry about what will happen to certain types of savings in the tax-advantaged education investment accounts known as 529 plans. A prepaid tuition plan, a special kind of 529 plan that allows families buy tuition credits for future use at today’s prices, usually has a time frame exemption for military service, says Busse. ​

[Know when to shift college savings account investments.]

3. Keep saving for college, but don’t expect a lot of extra earnings: Having an extra year before students enter college is great for parents who want to add more college savings to their child’s 529 plan account. However, the extra year won’t likely increase the amount earned from interest or investment growth by a large amount, says Tillery.

Typically, money that will be needed the following year shouldn’t be placed in stock-market based investments because of possible drops in value, she says. So in the final years of savings most investments should be in cash-equivalent investments, such as savings accounts or money market accounts.

[Learn how to talk about college savings with a high school senior.]

4. Find ways for a gap year student to sock money away for college: Parents generally won’t charge their children rent if they’re staying at home for one year before going to college. But the parent should ask the student for $100 to $200 per month that they’ll deposit into their child’s college savings plan, says Tillery.

Having to contribute to household expenses contributes to learning how to balance expenses after high school, she says.

If the money in the 529 plan is already enough to cover the college the student will attend, parents can put the money in a savings account for the student instead. This money can be used for expenses during college that can’t be paid with funds in a 529 plan account such as transportation, entertainment or fraternity or sorority dues, Busse says.

Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.