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How Does a 529 College Savings Plan Impact Financial Aid?
There is a misconception that owning a 529 college savings account means your student won’t qualify for financial aid once you fill out the Free Application for Federal Student Aid (FAFSA) — the form used by the federal government to determine the amount of federal aid a student may receive in grants, work study, scholarships and loans. Truthfully, saving in a 529 plan has a minimal impact on financial aid, and the benefits of saving for college outweigh the small financial aid impact.
Funds invested in a 529 plan are considered an account holder’s asset and treated similar to other assets the account holder has – including checking accounts, mutual funds, stocks/bonds, money market funds, or cash. These all count toward a family’s Expected Family Contribution (EFC), or the amount the government expects a family to contribute toward a college education. Depending on who owns the account, the amount of financial aid a student may receive can vary.
Accounts Owned by Parents
Typically, if the account owner is a parent, assets are calculated at the most favorable rate on the FAFSA. When calculating a family’s EFC, generally only a maximum of 5.64% of the account value will be considered. In the big picture, that is a minimal amount. And generally, withdrawals from a parent-owned 529 account are not included in the income portion of the financial aid calculation.
Accounts Owned by Students
If a student owns the account, their 529 plan is counted under their own assets and the EFC is calculated based on 20% of the value of the account. When filling out the FAFSA, students are expected to contribute more to their own education than their parents, and therefore, their assets are calculated at a less favorable rate.
Accounts Owned by Other Relatives or Friends
529 plans owned by grandparents, relatives, or friends are counted a little differently than if a student or parent owns the account. For any FASFA forms filed prior to the 2024-25 academic year, accounts owned by relatives or friends are not counted as assets. However, students are required to report any 529 withdrawals from the account as unearned income on future FASFA forms. This can impact financial aid by as much as 50%.
On the new simplified FASFA form (which will be in effect for the 2024-25 academic year), 529 accounts owned by relatives or friends will not be calculated in the EFC. Under new federal financial aid rules, withdrawals from these accounts will not be counted as student income.
Keep in mind, this information pertains to federal financial aid rules. Each school or program may have their own guidelines, as will private student loan programs. Families should talk with their financial advisor or the college financial aid office for information regarding their unique situations.
The point of a 529 savings plan is to set your student up for financial success. A dollar saved today is a dollar you won’t have to borrow in the future. You can learn more about additional 529 plan benefits here.
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