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House bill would eliminate aid exemption for student-owned 529s

(July 12, 2007) - UPDATE: The news item below was originally posted June 16, 2007. On July 11, 2007 H.R. 2669 passed in the full House by a vote of 273 to 149. The Senate is considering similar legislation which if passed will require negotiations between the House and Senate to develop a compromise bill.

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The House Education and Labor Committee approved H.R. 2669, the College Cost Reduction Act of 2007, on June 13 to boost college financial aid by nearly $20 billion over the next five years.

Included in the bill is a provision that would eliminate the current exclusion of student-owned 529s and Coverdell ESAs in the calculation of expected family contribution (EFC) for dependent students. Instead, student-owned 529s and ESAs would be counted as parental assets.

The bill would make certain other clarifications to the treatment of 529s and ESAs:

- Tax-free distributions from 529s and ESAs are not included in income or assets. This would apparently keep distributions from 529s owned by grandparents and other third parties from being picked up, an issue that is unclear under existing law.

- 529s and ESAs owned by independent students would be included as an asset of the student.

- Distributions from 529s, non-529 state-run prepaid tuition plans (i.e. Massachusetts U.Plan), and ESAs are not considered "other financial assistance" and therefore do not cause a dollar-for-dollar reducation in financial aid eligibility.

The effective date under the bill is July 1, 2009 which means the current exclusion would still be in effect for the 2007-08 and 2008-09 school years.

H.R. 2669 now goes to the full House for approval.

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