A 529 plan is a savings plan for education costs. There are two types of 529 plans, prepaid tuition plans and education savings plans. At least one version of the 529 Savings Plan is offered in all 50 states.
Here’s how the 529 Savings Plan gets reported and how it could impact your financial aid through FAFSA®.
529 Savings Plan owned by parent or student
529 Savings Plans that are owned by the student or parent where the student receives qualified distributions to pay for this year’s college costs do not get included in the “base-year income” that could negatively impact financial aid awards.
When listing assets, 529 plans will not be counted against the Expected Family Contribution (EFC) as long as the amount of parental assets is under $20,000. Should that amount be exceeded, then a maximum of 5.64% of parental assets get counted vs. other student assets, which count at 20%.
This is good because it reduces the amount counted against your EFC— a higher EFC could mean less financial aid.
529 Savings Plan owned by a grandparent
If a grandparent owns the 529 Savings Plan, it will have no impact on the student’s FAFSA® as an asset. Assets are only factored in when the student or parents own them.
As withdrawals are made against the 529 to pay for college, those transactions will be counted as student income on the FAFSA® and receive a 50% assessment rating. This means if your grandparents take out $10,000 to cover school costs, $5,000 will reduce the student’s eligibility for financial aid and get factored towards their EFC.
A tip for avoiding impacting EFC: if the student is expected to graduate in 4 years, wait until after the 2nd semester to make contributions since FAFSA® looks at income from 2 years prior.
529 Savings Plans are great resources to help cover school costs, but many schools are starting to adjust aid awards when finding out that families have these types of accounts. The schools have the ability to set their own rules when it comes to allocating need-based scholarships, so keep that in mind when you are planning for college.