Many people worry about whether a 529 Plan will impact their eligibility for financial aid. It will impact your aid, but may help you more than it will hurt. Understand the advantages of a 529 Plan and its minimal impact on financial aid.
Some colleges when reviewing your financials will use the CSS Profile, (College Scholarship Service), however most colleges use the FAFSA (Free Application For Student Aid). The FAFSA asks students to calculate the expected family contribution.
A 529 Plan owned by a dependent student or their parents is considered a parental asset by FAFSA. A 529 Plan owned by a grandparent will not be reported on the FAFSA. Currently, the FAFSA protects dependent student income up to $6,570. For parents, the allowance depends on the number of people in the household and the number of students in college. For 2018-2019, the income protection allowance for a married couple with two children in college is $25,040. Any parental assets outside of the income protection allowance will reduce a student’s financial aid package by 5.64% of the asset’s value.
Withdrawals from the 529 Plan do not affect financial aid. Once your student is in college, if you withdrew all the money to pay for year 1, it would not affect the financial aid in the subsequent years. This is different if the 529 Plan is owned by a relative or a grandparent. Any money that comes from that account to pay for a student’s college will be counted by the FAFSA as untaxed income. That can drastically reduce the amount of aid a student will receive in the following year. Depending on how much money is being used to cover the cost of college from that plan, a student’s financial aid may experience a decrease in as much as 50% of what was provided.
There are a couple of ways to avoid this. Transfer ownership of the account from the relative or grandparents to the parents of the student. But it will be counted as a parent asset and the students financial aid will be deducted by 5.64% of that amount. You can try to outguess the system by transferring the funds after the FAFSA is filed, but then you need to spend that money before it’s time to file the next FAFSA. It’s also important to open the parent 529 account in the same state as the other 529 account because some states have different rules that make transferring money between the two difficult. The other way to avoid the large deduction in financial aid from having another 529 held by a relative is to wait until January 1st of your students 2nd semester of the sophomore year of college to pay tuition after the last FAFSA has been filed.
If there are multiple family members outside of you (the parent) helping to fund your student’s college, keep close communication with them and consider creating a financial aid plan. If you have a strategy that everyone is aware of, it can go a long way to maximizing the amount of financial aid that your student will receive.
It’s also important to keep in mind that each college has its own system for determining need based financial aid and how the assets you or your child owns affect your aid will vary based on the college. To understand how the college your student is considering handles financial aid, contact their financial aid department and ask.
Paying for college is daunting for many and understanding the impact of owning a 529 Plan on needs based financial aid is critical. The FAFSA counts 529 Plans as an asset and part of the expected family contribution, but having a 529 Plan is definitely the preferred option versus not having one. In the end, having one will generally end up helping you more than it hurts.