Parents with more than one child should consider having a separate 529 plan for each sibling. This has an impact on investment strategy, state income-tax benefits and tax-free distributions.
- 529 plans can only have one beneficiary, which means each 529 plan’s investment strategy is designed based on a single child’s needs and investment time horizon.
- 529 plan gift tax benefits and some state income tax benefits are per beneficiary, as opposed to per taxpayer, so having separate 529 plans allows parents to potentially save more on taxes.
- Tax-free distributions can only be used for one beneficiary at a time.
But, will having separate 529 plan accounts affect financial aid eligibility? It depends.
Assets held in a student’s 529 plan are considered when determining the student’s financial aid eligibility. A sibling’s 529 plan assets may also be considered, depending on whether the sibling’s 529 plan is a parent-owned 529 plan or a custodial 529 plan, and which college the student attends.
To apply for need-based financial aid, students must complete the Free Application for Federal Student Aid (FAFSA). Nearly 200 colleges also require students to complete the CSS Profile in addition to the FAFSA to determine institutional financial aid. A student’s 529 plan assets and their sibling’s 529 plan assets are treated differently on the FAFSA and the CSS Profile.
Parent-owned 529 plans
A sibling’s 529 plan assets may affect a student’s eligibility for need-based financial aid, since a parent’s reportable 529 plan assets on the FAFSA includes the value of all of the 529 plans they own, including those of their children. 529 plans owned by a parent, including a sibling’s 529 plan, are considered parent assets on the FAFSA.
If parents are divorced or separated, only the parent who files the FAFSA must report 529 plans they own. If the non-FAFSA filing parent owns a separate 529 plan for the student, it is not reported as a parent asset.
A maximum of 5.64% of parent assets are counted when determining a student’s Student Aid Index (SAI). SAI, which was previously known as Expected Family Contribution or EFC, is the measure of a family’s financial strength in relation to its ability to pay for college.
For example, if a parent has $10,000 in reportable 529 plan assets the college would assume the family had $564 to pay for college, and so the student’s need-based financial aid package would be reduced by $564.
Students who attend a college that requires the CSS Profile must report all 529 plan assets that list the student as a beneficiary, regardless of the 529 plan account owner. Parent assets are counted as a maximum of 5% on the CSS Profile, after certain allowances.
Custodial 529 plans
A custodial 529 plan account is a 529 plan account that is owned by a beneficiary who is a minor. Since a minor cannot legally own assets, an adult custodian acts on behalf of the minor and manages the 529 plan funds until the beneficiary reaches legal age. In most cases, the custodian may not change the 529 plan beneficiary.
Assets in a custodial 529 plan account owned by a dependent student are reported as parent assets on the student’s FAFSA.
Generally, custodial 529 plans owned by a student’s sibling are not reported on the student’s FAFSA, since the sibling is the owner of the custodial 529 plan account. However, the CSS Profile requires students to report any assets owned by a sibling under age 19 and not yet in college, including 529 plans.
529 plans owned by a grandparent or other third party
A sibling’s 529 plan that is owned by a grandparent or anyone else other than the parent, such as an aunt, uncle or godparent, does not have to be reported on the FAFSA. Grandparent-owned 529 plans are also not reported on the beneficiary’s FAFSA.
Students who complete the CSS Profile must report all 529 plans that name the student as a beneficiary, including 529 plans owned by a grandparent.
SAI when there is more than one child in the family
Prior to the 2024-2025 FAFSA, a family who had more than one child in college could be eligible for more financial aid than a family with a single child in college. However, under the rules of the simplified FAFSA, this is no longer the case. The new rules do not divide the SAI by the number of children in college at the same time, which yields a higher SAI for many families. However, the Income Protection Allowance (IPA) is being increased, and will no longer be reduced when more than one child is enrolled in college simultaneously. This will shelter more parent income from the need analysis.
The CSS Profile reduces the parent contribution portion of the SAI by 40% when a family has two children in college, 55% when there are three children in college and 65% if a family has four or more children in college. Thus, if the parent contribution is $100,000, each child would have an SAI of $60,000 on the CSS Profile if there are two children in college at the same time and $35,000 if there are four children in college at the same time.