As a parent planning for your child’s college education, 529 savings plans can seem like a no-brainer. These tax-advantaged accounts help families build education funds while enjoying some nice tax breaks. But many families worry about a hidden catch – will having a 529 plan hurt their chances for financial aid?
The good news is that 529 plans have a relatively small impact on financial aid compared to other assets. When completing the Free Application for Federal Student Aid (FAFSA), a parent-owned 529 plan is treated as a parental asset. This means only 5.64% of the account value counts against potential aid – significantly better than the 20% assessment rate for student-owned assets.
Let’s break this down with real numbers. Imagine you’ve saved $50,000 in a parent-owned 529 plan. Only about $2,820 of that amount (5.64%) would potentially reduce financial aid eligibility. Compare that to if your child held $50,000 in their own name – $10,000 (20%) would count against them in aid calculations.
The recent FAFSA simplification has actually made 529 plans even more favorable. “The new FAFSA removes the question about cash support, which means grandparent-owned 529 plans no longer impact financial aid eligibility at all,” explains Mark Kantrowitz, financial aid expert and author of “How to Appeal for More College Financial Aid.”
This change represents a major opportunity for family financial planning. Grandparents can now contribute to a student’s education expenses without worrying about reducing their financial aid eligibility. Previously, distributions from grandparent-owned 529 plans were treated as student income, which could reduce aid eligibility by up to 50% of the distribution amount.
When it comes to who should own the 529 plan, the answer is typically parents. Parent-owned accounts receive the favorable 5.64% treatment, while student-owned 529 plans are assessed at the higher 20% rate. However, with the recent FAFSA changes, grandparent-owned accounts have become an attractive option as well.
Timing of 529 plan withdrawals also matters. For maximum financial aid benefit, families should coordinate withdrawals carefully with the financial aid application timeline. Since the FAFSA uses tax information from two years prior (the “prior-prior year”), large withdrawals should be strategically planned to minimize impact on aid eligibility.
It’s worth noting that some private colleges use a different financial aid form called the CSS Profile, which may treat 529 plans differently. “Schools using the CSS Profile often consider more assets and may have different assessment rates,” notes Shannon Vasconcelos, director of college finance at Bright Horizons College Coach.
When considering a 529 plan’s impact on financial aid, families should also understand how different types of financial aid work. Need-based aid, which depends on your financial situation, might be affected by 529 assets. However, merit-based scholarships, which are awarded for academic, athletic, or other achievements, typically aren’t influenced by your savings.
Another important factor is the financial aid policies at specific schools. Some colleges are more generous with institutional aid than others. “The most selective colleges often meet 100% of demonstrated financial need, making a 529 plan’s impact less significant compared to the benefits of having education savings,” explains Ron Lieber, author of “The Price You Pay for College.”
For families concerned about 529 plans affecting financial aid, there are strategic approaches to consider. Some families front-load college expenses by using 529 funds for the later years of college. Others might use 529 funds to cover expenses not included in the cost of attendance calculation, like computers or certain qualified expenses.
What about alternatives to
