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New law makes changes to financial aid treatment of 529s

(February 9, 2006) - Changes have been made to the federal aid formula under the Deficit Reduction Act of 2005 (signed into law by President Bush on February 8, 2006). Some of these changes impact 529 plans.

Beginning July 1, 2006, UGMA/UTMA assets held within a 529 savings plan will no longer be included with other student-owned assets in the formula for determining a family’s “expected contribution” towards college costs. What used to count against aid eligibility at the rate of 35 percent will now be assessed at no more than 5.64 percent of value. The picture brightens even more considerably for families using a state-sponsored prepaid tuition plan or the private-college Independent 529 Plan. Instead of causing a dollar-for-dollar reduction in federal aid eligibility, prepaid plans will now share the same treatment as 529 savings plans.

The new law specifies what the 529 account IS NOT (i.e. a student asset) but does not state what it IS. It would be logical to assume that you will have to treat both parent-owned and custodial 529 accounts as parental assets subject to the maximum 5.64 percent assessment rate.

Another change under the Deficit Reduction Act is that beginning with the 2007-08 school year, the assessment rate on student assets drops from 35 percent to 20 percent.

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