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.
- Change the account owner to either the student or the parent before distributions begin so that the account counts less heavily when determining aid.
- Hold off making distributions until after December of the sophomore year, assuming the student will wrap up their higher education in four consecutive years. Because the FAFSA looks at income from two calendar years back, students completing the FAFSA for their senior year generally enter the income they received from January of their freshman year through December of their sophomore year. So distributions made after that period will not be entered on FAFSAs filed for students who complete their education in four consecutive years.
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.