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Five things to know about 529s and financial aid
Many people are concerned with the effects that the funds in a 529 college savings plan will have on a student's financial aid eligibility. To help clear up any confusion, here are a few things to remember about how 529 plans are treated under the federal aid formula.
Students attending college in the fall of 2014 will need to submit their Free Application for Federal Student Aid (FAFSA) by June 30. For more information, please visit www.studentaid.ed.gov/fafsa.
1. The 529 account you established for your child may impact need-based financial aid.
As the custodial parent of a dependent student, your non-retirement investment assets are assessed at a maximum 5.64% rate in determining your child's Expected Family Contribution (EFC). Any 529 accounts under your ownership are counted as parent assets for this purpose.
For example, let's assume you have 529 accounts worth $10,000 on the day you file the FAFSA federal aid application. You must report the $10,000 along with your other countable assets, which will likely increase the EFC by $564. Higher EFC means less financial need.
The 5.64% rate is significantly lower than the rate (20%) at which the student's own investment assets, including UGMA or UTMA accounts, are assessed. The parent's asset assessment rate could be even lower, depending on your income. For any family with federal adjusted gross income below $50,000, and which is otherwise eligible to file Form 1040A or 1040EZ, assets are not counted at all.
Your income is another factor in determining EFC. The income reported on this year's tax return must be included on next year's financial aid application. Tax-free distributions from a 529 plan are excluded from this "base-year" income. This exclusion provides 529 plans with an advantage over mutual funds and other taxable investment accounts that must be tapped for college.