How do 529 plans affect financial aid?

Saving for college can be tricky since monetary assets of the family typically need to be reported on the FAFSA. However, saving for college almost always outweighs any related reductions in financial aid. Here we'll discuss how 529 plans can affect financial aid and the most beneficial way to save for college.

529 Account Ownership Matters

On the FAFSA, parent and student assets are treated differently. Parent assets are assessed at a maximum of 5.64% while student assets are assessed at 20%. This means that 5.64% of parent-held assets are counted towards the family's Expected Family Contribution (EFC), and a whopping 20% of student assets are counted the same way. In addition, some parent assets are able to be sheltered (omitted), for FAFSA asset purposes, unlike a student's.

Generally, the more assets a family (or student, in particular) has, the higher their EFC and the lower their financial aid.

529 plans are treated as assets of the account owner, not the beneficiary. Therefore, to maximize the amount of financial aid received, 529 plans should be in the name of the parent of a dependent student. In the case of independent students, the amount is considered a student asset and will be assessed accordingly.

Non-Parent-Owned Plans

There used to be a loophole on the FAFSA where any college savings plan owned by someone other than a parent did not need to be reported on the FAFSA. However, this was adjusted as part of the College Cost Reduction and Access Act of 2007. As of the 2009-2010 year, non-parent-owned plans do not need to be reported as an asset, but any distribution from the 529 plan to the student is treated as untaxed income.* This has an even greater negative impact, severely reducing the amount of need-based aid a student can qualify for.

Excluding 529 Distributions from Income

For 529 plans, any amount distributed to the account beneficiary from a parent or student-owned account does NOT need to be reported as untaxed income for the next FAFSA year. This is a preferable treatment of assets compared to other types of savings plans where withdrawals and distributions negatively impact the next year's financial aid.

College Savings vs. Student Loans

Overall, saving for college using a 529 college savings plan is more beneficial than relying heavily on financial aid, especially since a majority of aid comes in the form of student loans. In the short term, a 529 plan may reduce aid a little, but in the long term, it is more cost effective than years of repaying student loans. To see the difference between college savings and loan repayment, check out the Saving vs. Borrowing Calculator from Finaid.org.

*Source: FinAid.org, Section 529 Plans

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