How do 529 plans affect college financial aid?

Factual Questions
1

Most states allow people to save for college using 529 plans which allow tax-free growth of contributions until they are used to pay educational expenses.

But if a family has one, does its existence reduce the financial aid a student might get? If so, what is the motivation to setting up such an account?

What about a grandparent setting up a 529? Does this also affect possible financial aid?

2

Assets in a 529 plan of the parent or the child are considered assets of the parents in determining the parent’s expected family contribution (EFC). Withdrawals from the plan to pay for the child’s education are not considered income to either.

A grandparents 529 plan assets are not considered assets of either, however, when the funds are taken out by the grandparent and used for the kids education, the withdrawals are considered part of the child’s income.

Go the FAFSA site for more info.

3
4

529 plans affect Federal financial aid in different ways depending on who the owner is. If a parent or a dependent student owns the account, the assets are treated as parental assets, and about 6% of the balance is used to come up with the Expected Family Contribution. * If the student had an asset of similar size that was not a 529 (like a savings account) , it would be assessed at about 20% to come up with the EFC. For independent students who own their 529, it’s of course counted as a student asset, but I’m not sure how much of it is used to come up witht the EFC . If the grandparents ( or anyone else) owns the account, the balance won’t affect the EFC- but a distribution must be reported as income in the following year’s application.

The motivations. Well for starters, some people aren’t going to be eligible for any need-based aid under any circumstances. My kid’s tuition varied from $2500/semester full time undergrad to $5000 per semester full time graduate. Neither would have been eligible for need-based grants, so my choice was to make deposits in a 529 and get the tax benefits , deposit it in a savings account or other investment and pay taxes on any gain or pay out of current income.

  • and all of this also depends on the size of the household and how many people are enrolled in post secondary education in the household.