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Yes, your 529 plan will affect financial aid
http://www.savingforcollege.com/articles/yes-your-529-plan-will-affect-financial-aid-797

Update: 2016-09-12

by Kathryn Flynn

Earlier this year, we surveyed over 1,700 parents and grandparents to gain better insight into their college savings behaviors. As in previous years, we found that while 529 plans are the most common way families save for college, there is still a lot of confusion about how they work. This is especially true regarding the issue of how 529 savings can impact financial aid eligibility. In fact, 33 percent of our 2016 College Savings Survey respondents believe that savings in a 529 plan are not considered when a school determines financial aid eligibility. Whether this is true or not really depends on a couple of things, like who owns the plan, when withdrawals are taken and what type of aid you're applying for. In most cases, your 529 plan will have a minimal effect on the amount of aid you receive and will end up helping you more than hurting you.

15 facts about financial aid eligibility

Types of aid

All schools that offer federal need-based financial aid require students to complete the Free Application for Federal Student Aid (FAFSA). Schools will use information from the FAFSA to calculate a students Expected Family Contribution (EFC). However, there are around 300 schools that use an additional form to calculate institutional award eligibility, called the CSS Profile. A family's assets will be counted differently on each form. For example, assets in a grandparent-owned 529 plan are not reported on the FAFSA, but students may be asked to include them in the CSS Profile.

Since there are so few schools that use the CSS Profile and their requirements can vary by school, let's focus on how a 529 plan can affect the FAFSA.

529 plans and the FAFSA

Account ownership

The value of a 529 plan owned by a dependent student or one of their parents (529 plans do not allow joint ownership) is considered a parental asset on the FAFSA. Parental assets will reduce a student's aid package by a maximum of 5.64% of the asset's value. So if a parent has a 529 account worth $10,000, his child's financial aid award would be reduced by $564. Of course, no one wants to lose $564, but the tax-free investment gains you've earned in your 529 account could likely outweigh this tiny loss. But other student-owned assets are not treated as favorably. A custodial account under UGMA/UTMA, for example, will be counted as a student asset and will reduce the aid package by 20% of its value. So in this case a $10,000 student asset means $2,000 less financial aid.

As mentioned above, assets in a 529 plan owned by a grandparent or other relative are not included on the FAFSA.

What the new FAFSA rules mean for you

Earnings

Any interest, dividends or capital gains generated from a student's asset that are reported on their income tax return will be reported on the FAFSA. This untaxed income will be assessed at 50% when calculating EFC. Earnings in a student-owned 529 plan, however, do not have to be reported on the FAFSA and will have zero affect on financial aid.

Withdrawals

529 plan distributions are another area where the effect on financial aid will depend on the account owner. With a parent- or student-owned plan, 529 withdrawals used to pay for college will not be reported on the FAFSA. That means if you liquidate your account to pay for your child's sophomore year, there will be no effect on the next year's FAFSA.

But the situation gets a little stickier when the account is owned by a grandparent or other relative. The student will have nothing to report on the FAFSA while the money is sitting in this type of 529 plan, but any withdrawals used to pay for their college will be counted as untaxed income on the FAFSA. Let's say a grandmother wants to cover a full year of her grandson's tuition at a private college, which costs $45,000. He'll be a freshman in 2017, and he plans on applying for financial aid every year. On his first and second FAFSA, he'll have nothing to report, but when he applies for federal aid for the 2019-20 school year (when he's required to report prior-prior year income) his untaxed student income that was generated from Grandma's gift may reduce his aid package by as much as $22,500 Yikes!

To prevent this from happening, Grandma can wait until her grandson's sophomore year of college to pay his tuition. Another option is to transfer account ownership to the student's parent, but then the funds would be counted as a parental asset and reduce the following year's aid package by up to $2,538 ($45,000 x 5.64%).

Estimate your financial aid eligibility here

Earlier this year, we surveyed over 1,700 parents and grandparents to gain better insight into their college savings behaviors. As in previous years, we found that while 529 plans are the most common way families save for college, there is still a lot of confusion about how they work. This is especially true regarding the issue of how 529 savings can impact financial aid eligibility. In fact, 33 percent of our 2016 College Savings Survey respondents believe that savings in a 529 plan are not considered when a school determines financial aid eligibility. Whether this is true or not really depends on a couple of things, like who owns the plan, when withdrawals are taken and what type of aid you're applying for. In most cases, your 529 plan will have a minimal effect on the amount of aid you receive and will end up helping you more than hurting you.

15 facts about financial aid eligibility

Types of aid

All schools that offer federal need-based financial aid require students to complete the Free Application for Federal Student Aid (FAFSA). Schools will use information from the FAFSA to calculate a students Expected Family Contribution (EFC). However, there are around 300 schools that use an additional form to calculate institutional award eligibility, called the CSS Profile. A family's assets will be counted differently on each form. For example, assets in a grandparent-owned 529 plan are not reported on the FAFSA, but students may be asked to include them in the CSS Profile.

Since there are so few schools that use the CSS Profile and their requirements can vary by school, let's focus on how a 529 plan can affect the FAFSA.

529 plans and the FAFSA

Account ownership

The value of a 529 plan owned by a dependent student or one of their parents (529 plans do not allow joint ownership) is considered a parental asset on the FAFSA. Parental assets will reduce a student's aid package by a maximum of 5.64% of the asset's value. So if a parent has a 529 account worth $10,000, his child's financial aid award would be reduced by $564. Of course, no one wants to lose $564, but the tax-free investment gains you've earned in your 529 account could likely outweigh this tiny loss. But other student-owned assets are not treated as favorably. A custodial account under UGMA/UTMA, for example, will be counted as a student asset and will reduce the aid package by 20% of its value. So in this case a $10,000 student asset means $2,000 less financial aid.

As mentioned above, assets in a 529 plan owned by a grandparent or other relative are not included on the FAFSA.

What the new FAFSA rules mean for you

Earnings

Any interest, dividends or capital gains generated from a student's asset that are reported on their income tax return will be reported on the FAFSA. This untaxed income will be assessed at 50% when calculating EFC. Earnings in a student-owned 529 plan, however, do not have to be reported on the FAFSA and will have zero affect on financial aid.

Withdrawals

529 plan distributions are another area where the effect on financial aid will depend on the account owner. With a parent- or student-owned plan, 529 withdrawals used to pay for college will not be reported on the FAFSA. That means if you liquidate your account to pay for your child's sophomore year, there will be no effect on the next year's FAFSA.

But the situation gets a little stickier when the account is owned by a grandparent or other relative. The student will have nothing to report on the FAFSA while the money is sitting in this type of 529 plan, but any withdrawals used to pay for their college will be counted as untaxed income on the FAFSA. Let's say a grandmother wants to cover a full year of her grandson's tuition at a private college, which costs $45,000. He'll be a freshman in 2017, and he plans on applying for financial aid every year. On his first and second FAFSA, he'll have nothing to report, but when he applies for federal aid for the 2019-20 school year (when he's required to report prior-prior year income) his untaxed student income that was generated from Grandma's gift may reduce his aid package by as much as $22,500 Yikes!

To prevent this from happening, Grandma can wait until her grandson's sophomore year of college to pay his tuition. Another option is to transfer account ownership to the student's parent, but then the funds would be counted as a parental asset and reduce the following year's aid package by up to $2,538 ($45,000 x 5.64%).

Estimate your financial aid eligibility here

 

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