On Wednesday, November 19, 2020, Congresswoman Debbie Lesko introduced the Student Aid and Tax-Advantaged Accounts Reform (STAR). The goal of this proposal is to help families save for college and pay student loan debt.

This legislation, if passed, would change the Expected Family Contribution (EFC) formula on the FAFSA (Free Application for Federal Student Aid) formula to “better fit the needs of families with multiple children”. It would subtract all sibling 529 plans owned by parents from the calculation. 

The value of a 529 plan owned by a dependent student or one of their parents is considered a parent asset on the FAFSA. About the first $10,000 will fall under the Asset Protection Allowance (the exact amount depends on the older parent’s age). Any parental assets beyond that amount will reduce a student’s aid package by up to a maximum of 5.64% of the asset’s value.

So, if a parent’s 529 account exceeds the Asset Protection Allowance by $10,000, his child’s financial aid award could be reduced by as much as $564.

Use our Financial Aid Calculator to estimate the expected family contribution (EFC) and your financial need based on income, assets, family size and demographics.

According to a press release, the bill includes a House companion to the Higher Education Loan Payment and Enhanced Retirement (HELPER) Act (S. 2962) that was introduced by Senator Rand Paul.

“This portion changes tax-advantage retirement accounts, such as IRAs to allow borrowers, parents, and grandparents to pay off their student loans using funds from these accounts. Under this legislation, individuals could take, tax and penalty free, up to $5,250 from their 401(k) or IRA annually to pay for college or to pay back student loan debt.”

“In recent years, the student loan debt crisis has impacted individuals and families, and many are struggling to make payments on their loans,” said Congresswoman Lesko following the introduction of the bill.

“My bill addresses this crisis without having to utilize taxpayer funds for costly bailouts. I’m hopeful this legislation can lessen the burden on America’s families and help parents finance their children’s education more effectively.”

Financial aid expert Mark Kantrowitz believes the bill should be expanded and exclude all 529 plans from the FAFSA. “Otherwise, there is still a penalty for saving for college,” he says.

He also believes The HELPER Act should also be amended to exclude employer contributions to 529 plans to be excluded from income. “That way, employers can contribute up to $5,250 a year to pay an employee’s past, present or future college costs. The CARES Act provided a temporary exclusion from income for employer student loan repayment assistance programs. That exclusion from income needs to be made permanent,” he says.

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