10 Feb Does a 529 College Savings Plan Negatively Impact my Child’s Chance for Financial Aid?
When it comes to paying for college, most students need all the help they can get. You may be reluctant to open a 529 plan because you heard that it might hurt your child’s eligibility for financial aid. But, the reality is that 529 plans have a relatively minimal effect on financial aid eligibility.
Colleges consider a family’s income and assets when determining a student’s financial aid eligibility. A portion of a student’s 529 plan may be counted as available funds to pay for college and will increase the student’s Expected Family Contribution (EFC). EFC is a measure of a family’s financial strength – higher EFC equals less financial aid.
The amount of the impact depends on who owns the 529 plan account and when the funds are used to pay for college.
529 plans owned by a parent or a dependent student
Assets in 529 plans are counted as parental assets on the Free Application for Federal Student Aid (FAFSA) if the 529 plan account is owned by a parent or a dependent student. A maximum of 5.64% of parental assets is considered available funds to pay for college. That means $10,000 in a 529 plan owned by a parent or dependent student could reduce a student’s financial aid package by $564 at most. Distributions from a 529 plan owned by a parent or a dependent student are not counted on the FAFSA.
529 plans owned by a grandparent or other third party
Many grandparents want to help pay for a grandchild’s future college education. Grandparents who open a 529 plan don’t have to worry about their savings impacting the grandchild’s financial aid eligibility, as long as the funds remain in the 529 plan. Assets in 529 plans owned by a grandparent or other third party are not counted on the FAFSA.
However, distributions from a 529 plan owned by someone other than a dependent parent are counted as untaxed student income on the student’s FAFSA. Student income is assessed at up to 50%, which means a $10,000 distribution from a grandparent-owned 529 plan could reduce a student’s financial aid eligibility by $5,000.
Grandparents might consider waiting until after January 1 of the student’s sophomore year of college (junior year if the student is graduating in 5 years) to help pay for college since the FAFSA uses income information from two years prior. Or, if the 529 plan permits, they could change the 529 plan account owner to the student’s parent.
Institutional financial aid
Your child may also be eligible for grants and scholarships offered through their college. Some colleges use the CSS Profile in addition to the FAFSA to determine eligibility for institutional financial aid. Colleges and universities may each have their own rules when considering 529 plan assets.
All investing is subject to risk, including the possible loss of the money you invest. We recommend that you consult a tax or financial advisor about your individual situation.
For more information about any 529 savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Other state benefits may include financial aid, scholarship funds, and protection from creditors. Vanguard Marketing Corporation serves as a distributor for some 529 plans.
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