How does a 529 college savings plan impact financial aid?

published September 27, 2024

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. Saving in a 529 plan has a minimal impact on financial aid, and the benefits of saving for college can outweigh anything else.

Funds invested in a 529 plan are considered an account holder’s asset and treated similar to other assets, including checking accounts, mutual funds, stocks/bonds, money market funds or cash. These count toward the Student Aid Index (SAI)—formerly known as Expected Family Contribution (EFC)—a measure of a student’s and family’s ability to pay for college that is used to determine how much need-based financial aid a student is eligible for. 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 SAI, only a maximum of 5.64% of the account value will be considered. And 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 SAI 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; 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. Beginning with the 2024-25 academic year, the FAFSA will no longer factor in grandparent-owned 529 savings accounts, meaning grandparent-owned 529 assets and distributions will not affect their grandchildren’s financial aid eligibility.

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 your 529 savings plan may be to help set your student up for financial success. A dollar saved today may be one less dollar you won’t have to borrow in the future. Learn more about additional 529 plan benefits at BrightStart.com/why/529-benefits.

The treatment of investments in a 529 savings plan varies by school. Assets are typically treated as the account holder’s and not the student’s. (Student assets are generally assessed at 20%, whereas parental assets are generally assessed at 5.6%.) Any investments, including those in 529 accounts, may affect the student’s eligibility to get financial aid based on need. You should check with the schools you are considering regarding this issue.