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Starting with the 2024-2025 FAFSA opening in December 2023, distributions from a 529 plan do not count as student income on the Free Application for Federal Student Aid (FAFSA), regardless of who owns the 529 plan.
Which 529 Plans Are Reported as Assets and Which as Income?
Before FAFSA Simplification, student- and parent-owned 529 plans are reported as assets on the Free Application for Federal Student Aid (FAFSA), but distributions from these 529 plans are ignored.
A 529 plan that was owned by anybody else, such as a grandparent, aunt or uncle, was not reported as an asset on the FAFSA, but distributions counted as untaxed income to the student on the FAFSA in a subsequent academic year.
This is no longer the case, so grandparents and other loved ones can contribute to the student’s education without fearing that it would be counted as income for financial aid purposes.
Wondering how your 529 plan may impact financial aid? Use our Financial Aid Calculator to estimate your financial need.
The FAFSA Uses Prior-Prior Year Income
Ever since the 2017-2018 academic year, the Free Application for Federal Student Aid (FAFSA) has used prior-prior year income and tax information instead of prior-year income and tax information.
This means that the 2023-2024 FAFSA is based on 2021 income and tax information.
The switch from prior-year (PY) information to prior-prior year (PPY) information allows the FAFSA to be based on federal income tax returns that have already been filed, as opposed to tax returns that are in the process of being filed.
Income information does not change by much from one year to the next, except during economic downturns, such as the one caused by the coronavirus pandemic. In such a situation, families can appeal for more financial aid by asking the college to switch their FAFSA from using prior-prior year information to an estimate of income during the academic year, also called the award year.
Running this process in reverse means that income during the 2022 tax year will be reported on the 2024-2025 FAFSA.
Impact of PPY on When Student Income Affects the FAFSA
Income information during the tax year that begins on January 1 of the student’s sophomore year in high school will affect their financial aid eligibility during the freshman year in college. Income prior to this date does not get reported on the FAFSA.
Income during subsequent tax years will affect the FAFSAs that are filed for subsequent years in college.
If the student will be graduating in four years, income information from the tax year that begins on January 1 of the sophomore year in college will not affect the financial aid they receive during their undergraduate education.
