As tuition costs continue to rise and federal and state financial aid becomes increasingly limited, parents are absorbing a larger percentage of their children’s higher education costs. 529 savings plans can be a big help for families looking to cover as much of their college expenses as possible while keeping their student loan debt low. However, many parents are wondering, “Does a 529 plan affect financial aid?” Let’s find out in this comprehensive guide to the relationship between 529 plans and financial aid.
Understanding 529 Plans and Their Role in Education Savings
What Is a 529 Savings Plan?
A 529 plan refers to a tax-advantaged savings plan that can be used to pay for a wide range of education costs. As a 529 account holder, you have several investment options to choose from, and your funds may increase or decrease depending on market performance. The earnings in your account and withdrawals for qualified expenses are exempt from both federal and state taxes.
Who owns 529 accounts? Most 529 account holders are parents who want to save money for their children’s education. Nonetheless, it’s also possible for grandparents, relatives, and friends to set up a 529 plan. Anyone who has a Social Security number (SSN) or a Tax Identification Number (TIN) can own and contribute to a 529 account.
Key Benefits of a 529 Plan
A 529 savings plan is one of the most preferred ways to pay for college because it offers many benefits. It provides great investment flexibility, gives you full control of your account, and allows you to make tax-free withdrawals. Moreover, it can be used to cover a wide array of education expenses, including tuition and fees, apprenticeship programs, room and board, books, supplies and equipment, internet access, and even student loan repayment.
How 529 Plans Affect Financial Aid Eligibility
The Role of Assets and Income in Financial Aid Eligibility
So, does 529 affect financial aid? Yes, but the impact of 529 on financial aid depends on the parents’ income and assets. Compared to assets, income plays a much more significant role in determining a student’s eligibility for aid. For the purpose of obtaining financial aid, assets include the parents’ checking, savings, brokerage, and 529 accounts, as well as real estate. A primary residence, retirement savings, and annuities aren’t included.
FAFSA and the Treatment of 529 Plans
Colleges and universities that provide federal financial aid require students to fill out the Free Application for Federal Student Aid (FAFSA) form. They’ll use the information from the form to work out an applicant’s Student Aid Index (SAI). Formerly known as Expected Family Contribution (EFC), this index measures a family’s ability to cover college expenses. Is reporting 529 plans on FAFSA required? It depends on the 529 ownership. If the student or the student’s parent is the one who owns a 529 plan account, it’s necessary to include in the FAFSA 529 plan information.
Impact of 529 Plans Based on Ownership
Parent-Owned 529 Plans
On the FAFSA, assets in parent-owned 529 accounts are regarded as parental assets. Parental assets can lower the amount of financial aid a student receives by up to 5.64% of the value of the account. This is a more favorable rate compared to student assets.
Student-Owned 529 Plans
How does a 529 plan affect financial aid if it belongs to the student? In this case, the funds in the 529 account will be considered the student’s assets, and the SAI will be calculated at 20%. The higher SAI will reduce the student’s eligibility for financial aid much more than if the parent is the account holder. That’s because students are expected to contribute more toward their own education.
Grandparent- or Third-Party-Owned 529 Plans
As a result of recent updates to the FAFSA Simplification Act, 529 plans that belong to grandparents, relatives, or friends won’t be regarded as student assets. As such, withdrawals from such accounts won’t be treated as student income. Previously, students were required to report withdrawals from non-parent-owned 529 plans on their FAFSA forms. FAFSA considers these funds unearned income and counts 50% of it as SAI. With the new rules, grandparents, relatives, and friends can set up a 529 plan and contribute to a loved one’s education without worrying about 529 financial aid impact.
Understanding the Detailed Effects on Financial Aid
Examples Illustrating 529 Plan Impact on Financial Aid
To get a clearer understanding of 529 plan financial aid impact, let’s look at a couple of examples. Suppose you’re a parent who opened a 529 account on behalf of your child. If you’ve saved $30,000 in your account, your 529 will only lower the amount of financial aid your child qualifies for by $1,692 or 5.64% of your total account value.
In another example, a student owns a 529 plan and has $30,000 in their account. With an SAI of 20%, the 529 can reduce the student’s financial aid package by up to $6,000, which is more than three times compared to a parent-owned account.
Strategies to Minimize Negative Impact
To reduce the impact of 529 plans on financial aid, you can take advantage of the changes to the FAFSA Simplification Act. Since grandparent- and third-party-owned 529 plans no longer affect financial aid eligibility, consider having one of your parents, relatives, or friends set up an account for your child. If your child qualifies for financial aid, this strategy can potentially save you thousands of dollars.
Get Expert Advice From Pasquesi Sheppard
Understanding how 529 plans affect financial aid can be confusing and challenging, so it may be a good idea to seek professional advice if you have any doubts. If you’re looking for financial consultants you can trust in Lake Forest, Illinois, get in touch with the dedicated team of highly qualified and experienced experts at Pasquesi Sheppard. From tax accounting to family financial planning, we provide a wide range of financial services to help individuals and businesses in Lake Forest and Chicago achieve their goals and grow their wealth. Contact us today to schedule an appointment.
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