(August 13, 2020) - Families often wonder what the effects of 529 plans are on financial aid and how the two work together. The answer depends on a couple of key questions: who owns the plan and when withdrawals are taken. In most cases, your 529 plan will have a minimal effect on the amount of aid you receive and will actually end up helping you more than hurting you.
The value of a 529 plan owned by a student or a parent is considered a parental asset on the Free Application for Federal Student Aid (FAFSA). According to CollegeSavings.org and Savingforcollege.com, approximately the first $10,000 will fall under the Asset Protection Allowance (the exact amount depends on the parents’ age). Any parental assets beyond that amount will reduce a student’s aid package by a maximum of 5.64% of the asset’s value when determining the Expected Family Contribution (EFC). The EFC is the amount the student’s family is expected to pay for the student’s higher education costs for that academic year. The financial aid formula assumes, at most, your family will use 5.64% of parent investments for college costs (even though your family likely plans to use 100% of your college savings account to pay for college!). That’s good news for savers. For example, if your family has $25,000 in a 529 account, the financial aid office will assume only $1,400 is available to use for college costs (that’s only $1,400 you won’t receive in financial aid). Any amount you can save will be much more beneficial to you than the small amount you won’t receive in financial aid.
Things change when the account is owned by a relative. The student will have nothing to report on the FAFSA while the money is sitting in a relative-owned 529 plan, but any withdrawals used to pay for their college will be counted as untaxed income on the FAFSA. Savingforcollege.com gives this example: Let’s say a grandmother wants to cover a full year of her grandson’s tuition at a private college, which costs $45,000. He’ll be a freshman in the fall, and he plans on applying for financial aid every year. Due to FAFSA using prior-prior year’s info (the year before the prior tax year), on his first and second FAFSA, he’ll have nothing to report. However, when he applies for federal aid for the third year of college his untaxed student income that was generated from Grandma’s gift may reduce his aid package by as much as $22,500. SavingforCollege.com suggests transferring account ownership to the student’s parent, keeping in mind the funds will be counted as a parental asset and reduce the following year’s aid package up to $2,538 ($45,000 x 5.64%).
Saving and paying for college can be confusing and nerve wracking but you have favorable options. Take advantage. It’s always a good idea to consult a financial advisor and/or your 529 plan’s customer service department before making any decisions. To learn more about your WA529 plan make sure to visit our Knowledge Cafe where we deliver free weekly webinars complete with Q&A sessions at the end. For more info visit https://www.get.wa.gov/webinars