Q: My eldest granddaughter is going to college next year in Europe. I created a Coverdell Education Savings Account for her at birth. What is the best way to use that money to pay her educational expenses and avoid currency fluctuations? -- Michael Diamant
A: In order to use either a Coverdell account or 529 college savings plan to cover her college costs, you'll first need to verify that the foreign college your granddaughter wants to attend is considered an eligible educational institution by the IRS. To qualify, a college has to participate in U.S. Department of Education's Federal Student Aid program; there are more than 320 international colleges that are part of the student aid program for the 2017-2018 school year.
Look up colleges that participate to see if your granddaughter's college is on the list. If it's not, contact the college (start with the financial aid office or the office for international students) and ask whether the college is approved to receive federal financial aid from the U.S. The college should be able to provide you with its student aid code to verify that.
Once you've confirmed that the college is eligible, figure out how much of her total expenses will be considered approved educational expenses under IRS guidelines. "To pass the sniff test, think about what would be a qualified expense at a U.S. school," says Beth Walker, a financial planner at The Wealth Consulting Group in Nevada and founder of Center for College Solutions. Tuition, room and board, books, and computers are all fair game. But expenses unique to going to college abroad -- such as the fees for a student visa or plane tickets to and from Europe --won't qualify.
As for currency fluctuations: Your withdrawals will be tax-free as long as they are for qualified expenses, regardless of the current exchange rate.
But currency differences do, of course, affect how far the money in your account will go. There's little you can do to control that, although Walker does recommend accelerating your payments to the college if there's a particularly attractive exchange rate this year, or if there's reason to expect the the dollar will lose strength to the currency in the country where your granddaughter's college is. So, for example, for colleges in Canada or Britain, it'd be smart to ask the college if you can prepay for two years to take advantage of a favorable conversion rate, Walker says.
And be sure to ask about discounts for prepaying. Many colleges in the U.S. and abroad will offer that.