Now let’s see how a 529 account affects federal financial aid.
Under the federal methodology, 529 plans — both savings plans and prepaid tuition plans — are considered an asset of the parent if the parent is the account owner. In this case, the value of the account is listed as an asset on the FAFSA. Under the federal
formula, a parent’s assets are assessed (counted) at a rate of no more than 5.6%. This means that every year, the federal government treats 5.6% of a parent’s assets as available to help pay college costs. (By contrast, student assets are assessed at a rate of 20%.)
There are a few points to keep in mind regarding the classification of 529 plans as a parent asset:
- A parent is required to list a 529 plan as an asset only if he or she is the account owner of the If a grandparent is the account owner, then the 529 plan doesn’t need to be listed as an asset on the FAFSA (this doesn’t seem fair, but grandparent-owned 529 accounts are counted in a different way, discussed below.)
- Any student-owned or UTMA/UGMA-owned 529 account is also reported as a parent asset if the student files the FAFSA as a dependent student. A 529 account is considered an UTMA/UGMA-owned account when UTMA/UGMA assets are transferred to a 529 account on behalf of the same beneficiary.
- If your adjusted gross income is less than $50,000 and you meet a few other requirements, the federal government doesn’t count any of your assets in determining your So your 529 account wouldn’t affect your child’s financial aid eligibility at all.
Withdrawals from a parent-owned 529 account that are used to pay the beneficiary’s qualified education expenses aren’t classified as either parent or student income on the FAFSA the following year.
Now, what about grandparent-owned 529 accounts? Grandparent-owned accounts are not listed as an asset on the FAFSA. However, withdrawals from a grandparent-owned 529 account are counted as student income on the FAFSA the following year. Student income is assessed at 50%, which means that a student’s eligibility for financial aid could decrease by 50% in the year following the withdrawal. To avoid having a distribution from a grandparent-owned 529 account count as student income, a grandparent can delay taking a distribution from the 529 plan until any time after January 1 of the grandchild’s sophomore year of college (because there will be only one FAFSA left to complete, and it will count income from two years prior.) Another option is to wait and take a 529 distribution after the grandchild graduates and use the funds for student loan repayment (there is a $10,000 lifetime limit per 529 plan beneficiary on repaying student loans).
Note: Starting with the 2024-2025 FAFSA, students will not need to report distributions from a grandparent-owned 529 plan. Students won’t be required to report any type of cash support.
Regarding the institutional methodology, 529 plans are generally treated the same as under the federal methodology. But check with your child’s individual college for more information.
Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.
