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How 529 plans impact aid from private colleges

Posted: 2010-03-12 - Lori Johnston is a freelance writer in Georgia.

by Lori Johnston

If your child's education dreams include a private college or university, you may be wondering how your 529 savings will affect your application for financial aid to pay for tuition and other college costs.

All federal aid is based on the same federal aid formula, no matter which school your student is attending. But institutional financial aid from any particular college or university is based on that school's own institutional formula or methodology, which varies from school to school. Any institutional formula can treat a 529 plan as the formula is devised.

"I think private schools obviously look at 529 plans as a source of funds as far as paying for college, although they won't come out and say it has an impact," says Gary Carpenter, a CPA and executive director of the Syracuse, N.Y.-based National College Advocacy Group. "If you're a director of financial aid, and you know there's financial aid available (through a 529), it's going to impact what type of money the college is going to give out of their own endowment."

Carpenter says he has seen more private institutions requesting details from parents about 529 plans as endowments have taken hits.

"They have to be very careful how they can award funds," he says. "At the same time, they have returning students who have different financial situations (who) they want to keep and help through college."

Under the "institutional methodology" created by the College Board and used by some schools to calculate eligibility for private institutional aid programs, 529 savings are included in the parents' net assets, which are assessed at 3 percent to 5 percent, depending on the school.

But not all private schools choose that methodology.

In fact, Carpenter adds that up until a couple of years ago, 529 assets were not reported as that of a parent or student on the FAFSA, or Free Application for Federal Student Aid, form, which the federal government uses to base its expected family contribution. Parental net assets are assessed at 5.6 percent for federal aid.

Private colleges have access to the FASFA form as well as the College Board's CSS/Financial Aid Profile application, if using the College Board's institutional methodology. Because of a school's choice to use that methodology or other formulas, financial advisers and parents report different experiences in how private schools perceive 529 savings, and the National Association of Independent Colleges and Universities is unable to say how influential 529 savings are in determining aid packages.

Carpenter admits it's confusing when one school treats it one way, and another school completely ignores 529 savings when determining aid packages. "Every situation is different," he said.

Karin Johns, director of tax policy for the Washington, D.C.-based National Association of Independent Colleges and Universities, says state-run 529 college savings plans remain tremendously popular for families whose children attend its member schools, and the organization supports the use of 529 plans.

Mike Humann, a certified college planning specialist based in Troy, Mich., and a member of the American College Funding Association, says he's seen an impact on some of his clients.

"Colleges know that it's a 529. It has to be used for education; otherwise there are penalties," he says. "I've seen families with a 529 that have received a little less money. (Their 529 has) put them over their asset threshold, which has impacted their overall aid package."

If your child is enrolling, be candid and describe your situation with the college, says Rolf Wegenke, president and CEO of the Wisconsin Association of Independent Colleges and Universities. He says many people don't think they'll get financial aid, so they don't bother to apply, even if their 529 savings are down or a parent has lost a job.

All colleges will see the numbers on the FASFA form and will come back with an award package to fill what they perceive as the need, Carpenter says. Parents shouldn't be afraid to ask the individual schools: What are you using to calculate that award?

Humann recommends meeting with a financial aid officer to explain your situation, in the case of a foreclosure, divorce, medical crisis, or other situation that has increased financial stress.

Approaching a university by saying, "I don't want to use all my 529 money," is not a good reason because universities are dealing with their own problems, he says.

Posted March 12, 2010

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