529 College Savings Plans - The Impact on Financial Aid

In parts one and two of our series on the 529 College Savings plan we detailed the financial and tax benefits of contributing to a 529 plan. Now, we look closely at how it may impact your quest for financial aid.

How the 529 account is treated for federal financial aid purposes generally hinges on who owns the account – the student, the custodial parent, or someone else.

If a dependent student or the custodial parent owns the account, it is treated as a parental asset on the Free Application for Federal Student Aid (FAFSA). And will have a relatively low impact on aid. The federal aid formula assumes that no more than 5.64% of a parent’s assets are available to pay college expenses. In contrast, the formula assumes that 20% of the student assets are available for college.

If an independent student owns the account, it is treated as a student asset and so 20% of its value will impact federal aid.

If the account is owned by someone else – such as a grandparent or friend – the account is not entered on the FAFSA as an asset. Instead, distributions from the account are generally entered as the student’s income and may have a significant impact on aid. The federal aid formula assumes that as much as 50% of a student’s income is available to pay college costs. Fortunately, there are strategies you can employ to help minimize the impact.

Some states and colleges use applications other than FAFSA when determining eligibility for non-federal aid programs, and those applications may treat 529 accounts and distributions differently than described here.

Need assistance navigating the road to 529 savings plans? Copper leaf Financials’ team of CPAs and experienced wealth management advisors assist families in all of their financial endeavors - including planning for college. We know how to structure your investments with the most cost efficient and tax effective methods, so that you can work towards your goals and the students in your family can work towards their degrees. For more information call 802-878-2731.

See also:

Part One: 529 College Savings Plans - Save for Your Child’s Future and Save on Taxes

Part Two: 529 College Savings Plans - Save for Your Child’s Future and Save on Taxes