529 plan details can lower financial aid

http://www.savingforcollege.com/articles/20100115-529-plan-details-can-lower-financial-aid

Before facing those intimidating piles of financial aid application forms, consider how your 529 plan for college savings could affect the ability to receive those funds.

To maximize your college savings strategy it's wise to clear up any misunderstandings now and take potential steps to receive more need-based aid.

Filing for financial aid with 529s in mind can assist you during early 2010, as FAFSA, or Free Application for Federal Student Aid, applications are turned in, typically, from January through March.

"The FAFSA is based on your assets on the day you file the application," says Joe Hurley, a CPA and founder of Savingforcollege.com. "If you change your assets the day before, that's effective for the purpose of that application."

One change could impact 529s

The new FAFSA form has changed in one major way with regard to 529 plans, says Gary Carpenter, a CPA and owner of Syracuse, N.Y.-based College Planning Services.

An UGMA/UTMA account with the student as a beneficiary is assessed at a 20 percent rate in determining the expected family contribution toward attending college. But a special exception says that 529s are not reportable as student assets.

Whether owned in an UGMA or UTMA account, or directly by either the student or the parent, a 529 account for a dependent student is reported as a parent asset and subject to a lower assessment rate of 5.64 percent.

One option is to move assets from the student category into the parent category to reduce your expected family contribution immediately, Hurley says. To do so, take money that's in a UGMA or UTMA and put it into a 529 UGMA or UTMA, also known as a custodial 529 account. "A parent or guardian has to sign the paperwork and act as a custodian of the account, but it's really owned by the minor," Hurley says.

Hurley warns that there are some disadvantages to taking this step. One is because the custodial 529 is more restricted than a parent-owned 529, he says. The beneficiary cannot be changed to another family member, at least not until the current beneficiary reaches the age of majority. At the age of majority, the current beneficiary takes over direct ownership of the account, as with a regular UGMA or UTMA.

Also consider this: To move the money into a 529, any existing investments have to be liquidated because 529s only accept cash.

"The process of liquidating investments could trigger capital gains, depending on the situation," Hurley says. "It's not a slam dunk."

Meanwhile, plans that are owned by the parents for other siblings also are considered parent assets. "If you have a 529 plan for the younger sister, that would have to be reported as a parents' asset," Carpenter says.

Income has an impact

Consider the income, not just the assets.

"Some of the confusion, I think, is the impact of income in affecting financial aid eligibility," Hurley says. "It's not just assets you worry about, it's income. Income is typically a bigger determinant of aid eligibility than assets."

For those filing a FAFSA in 2010, it's the 2009 income that counts, and income is assessed at as much as 47 percent in determining expected family contribution.

Hurley says a big benefit with 529s is if you took distributions in 2009. As long as it came out tax free, it's not included in base income on the 2010 application, as opposed to someone who sold mutual funds in 2009 to pay for that year's college expenses.

Also, make sure you are identifying student or parent assets correctly. Some families tend to put some information under the student asset category incorrectly, when the parents actually own the plan, says Kalman A. Chany, president of Campus Consultants Inc. and author of "Paying for College Without Going Broke."

"No one's going to tap you on the shoulder and say you did it wrong, but you're going to get less aid," he says.

Aid policies can differ

Some private colleges are asking questions that are more detailed about funds in 529s and other savings vehicles, especially about plans owned by grandparents. Chany says in his book those questions include: Who sets them up? Who owns them? How much will be withdrawn or redeemed in a given year?

It's important for parents to investigate and determine the school's policy. If it's working against you, ask for a meeting.

"I would have a discussion with the financial aid office (and say), 'Let's not penalize the student because we saved for college,'" Carpenter says. "I do not want the student to be penalized because they used a 529 to pay for college. Some will; some won't. You want to make sure you're pushing very hard on that side."

Posted January 15, 2010